Debt and Equity Financing
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Every company that raises outside money does it one of two ways: debt or equity. Balancing the two is one of the most consequential decisions a company makes, since each comes with its own trade-offs for cost, control, and risk.
What does "financing" mean?
Financing is money a company raises that it didn't earn through its own operations — it comes from an external source, like a bank or an investor. Every company eventually needs it, whether to fund day-to-day operations, buy equipment, or expand.
What is debt financing?
Debt financing means borrowing money that has to be repaid, with interest, on fixed terms — a bank loan or a bond issuance, for example. The lender doesn't get any ownership stake in the company; they just get their money back plus interest.
What is equity financing?
Equity financing means raising money by selling a stake in the company itself, typically by issuing shares of stock. There's no repayment obligation and no interest, but the trade-off is giving up a permanent slice of ownership and control.
Debt and equity trade cost for control. Debt is generally cheaper (interest is tax-deductible) but comes with fixed, mandatory payments. Equity has no repayment obligation but costs more and means giving up ownership. Most companies use a mix of both rather than relying on either exclusively.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 98 on BEC. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.