In business, there are different departments that handle every matter that helps to run it smoothly. One of these departments is the finance – which is responsible for everything with regards to money from capital investment decisions to investment banking. Its main priority is to take full advantage of shareholder value using long-term and short-term financial planning together with the implementation of several strategies.
In this type of finance, it also includes the discussion of two types of financing: equity and debt. Equity is another way of ownership where companies sell part of their share so that they can expand their operations. In turn, the individual or another company that will buy the share will have to accept all the risks like afailure of the business which will result in receiving nothing. Most companies prefer this method because the investor will bear all the risk rather than raise capital and have tax considerations. In return, the investor will get control over the company and have claims on the future earnings. It can be in the form of share price appreciation or receiving regular dividends. On the other hand, debt is getting a loan similar to car or mortgages. The funds borrowed should be repaid together with an interest. In some cases, some sellers require companies to give collateral. There are also advantages in debt, including funding at lower rates than equity, the interest on the debt is tax deductible, and the owner maintains ownership and control of the business. Note that getting too many loans for your company will reduce its present value, which is not good. The key is managing the debt properly so the owners can keep their business running smoothly. In most cases, companies are using a combination of equity and debt financing to expand their operations.