: Business Financing and the Capital Structure - Essay Example

Secondly, it allows a firm to tap into the investors network that could add more benefits to the business in terms of credibility and growth. Thirdly, investors are likely to consider a long-term option rather than short-term allowing the firm to grow more. Another advantage could be in the sense that one will have more money to expand on the business and this option could also be beneficial in the sense that when the business fails, the owner may not be liable to paying back the investment. Disadvantages of using equity include partial ownership of enterprise where the investor will want to own a share of the business and profits that it attracts.

There is also the need for greater consultation prior to decision making process because the returns expected by the investors could be more than that of bank loans, and the time and effort taken to find the best investor. Finding the appropriate investors could be a long and tiresome process yet the business may require immediate help. All these issues have to be considered before taking this option. Debt financing on it part, regards to capital raised by way of bank financing – loans. In this regard, unlike equity financing, the capital gained, is secured by way of some form of security/ collateral.

In addition, is the aspect of loan repayments, which are usually spread out in installments; to be repaid plus the interest accrued (Brealey, 2008). Each of the two avenues of capital financing has both advantages and disadvantages; given the prevailing economic contexts. In terms of Equity financing as Benjamin & Joel (2005) aver, advantages include: - less risk than loans, especially when the entrepreneur cannot afford to take debt; no need of channeling profits into loan repayment; extended time-frame on investment by investors; the presence of more cash at hand and enhanced