Debt and equity compared
What difference does it make whether funding comes from debt or equity? Debt is a burden – repayments of principle and interest drain cash flow. Equity does not necessarily involve parting with any cash – even the dividends can be deferred until better cash flow days. Moreover, equity investors accept higher risk in exchange for better returns in the future. This means that you can persuade them to swap their cash for your shares when the bankers are sucking in their breath and shaking their heads. But while the cash flow effect of equity is far less painful, the overall cost is actually greater than that of debt.
Debt and equity compared
| Debt | Equity |
|---|---|
| Lenders are risk averse | Equity investors accept higher risk |
| No loss of ... |
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