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[Blaka]

Companies decide how to get money either by borrowing (debt) or selling shares (equity). The cost is a big deal. Borrowing can be cheaper because you pay less in interest, and you can even deduct that from your taxes.

Being okay with taking risks matters too. If a company is cool with risks, it might borrow money to try and make more for its owners. But if a company borrows too much, it can be risky and cause problems.

How a company is already set up financially matters too. A company looks at what it already owes and figures out the best way to get more money without causing issues. They want to keep a good balance that fits their plan for growing and how much risk they can handle.

 

[IB DD]

Most startup companies want to retain the power to take decisions for the company and influence growth patterns for the company, that's why they would rather choose to borrow than let someone come in with equity financing to come and share decision making powers.

 

[Wisdom01]

i think it's important to note that debt financing comes with its own set of risks and obligations. Loans must be repaid with interest, and failing to do so can have serious consequences, including legal action and damage to the business's credit score.

 

[halfhearted07]

A company's choice between debt and equity financing hinges on several factors. Debt financing often offers lower costs due to tax-deductible interest, making it attractive for firms seeking to minimize capital expenses. However, it amplifies financial risk and may not be viable for startups lacking collateral or revenue history. Equity financing, though dilutive to ownership, grants flexibility and avoids fixed repayment schedules, appealing to companies prioritizing control and growth. Market conditions, such as interest rates and investor sentiment, also sway decisions. Additionally, tax implications, lender requirements, and investor preferences shape the financing mix. Striking a balance between debt and equity aligns with optimal capital structure goals, considering industry dynamics and risk profiles. Ultimately, companies assess these factors to determine the financing avenue that best suits their needs, balancing cost, risk, control, and growth objectives.

 

[Dean1]

Debt interest payments are generally tax deductible, which can save the business money on taxes. When compared to equity financing, where dividends are not tax deductible, this tax benefit may make debt financing more alluring.