Business Tools Downloadable checklists, model business plans, forms and other documents. Our small business online advice columnist. Debt financing means borrowing money that is to be repaid over a period of time, usually with interest. The lender does not gain an ownership interest in your business and your obligations are limited to repaying the loan.
Equity financing describes an exchange of money for a share of business ownership.
The major disadvantage to equity financing is the dilution of your ownership interests and the possible loss of control that may accompany a sharing of ownership with additional investors. Debt and equity financing provide different opportunities for raising funds, and a commercially acceptable ratio between debt and equity financing should be maintained. Excessive debt financing may impair your credit rating and your ability to raise more money in the future. If you have too much debt, your business may be considered overextended and risky and an unsafe investment. In addition, you may be unable to weather unanticipated business downturns, credit shortages, or an interest rate increase if your loan's interest rate floats.