If you will be asked to choose what type of financing you will use to finance your

business venture, what it would be, debt or equity? Why?

If I will have a business venture, I will implement a proportionate distribution of financing –

meaning part of it is through debt and a portion of it is equity. This is to avail the advantages
of either financing source without compromising my interest as the owner of the business. As
to how I will distribute it, here’s an illustration:

Particulars Sample Amount

Funds Needed 1,000,000
Less:
Equity Financing
60% retained to my Capital
40% sold to Outsiders 400,000
Less: 600,000
Debt Financing 600,000
Excess 0

First, equity financing to be sold to outsiders will be limited to only 40% ownership of the
Capital Stocks. The remaining 60% will be retained by me in order to protect my controlling
interest in the Company.

A shareholder has a controlling interest in a business when he or she owns more than 50% of
the company’s voting shares, giving him or her the deciding voice in shareholder meetings and
control over company direction.

Deciding first on equity financing is vital because of the following advantages:

1. Less burden. With equity financing, there is no loan to repay. The business doesn’t have
to make a monthly loan payment which can be particularly important if the business
doesn’t initially generate a profit. This, in turn, gives you the freedom to channel more
money into your growing business.

2. Credit issues are gone. If you lack creditworthiness – through a poor credit history or
lack of a financial track record – equity can be preferable or more suitable than debt
financing.

3. Learn and gain from partners. With equity financing, you might form informal
partnerships with more knowledgeable or experienced individuals. Some might be well-
connected, allowing your business to potentially benefit from their knowledge and their
business network.
The remaining funds needed will be sourced through debt financing, due to its advantages as
follows:

1. Retain control. When you agree to debt financing from a lending institution, the lender
has no say in how you manage your company. You make all the decisions. The business
relationship ends once you have repaid the loan in full.

2. Tax advantage. The amount you pay in interest is tax deductible, effectively reducing
your net obligation.

3. Easier planning and forecasting. You know well in advance exactly how much principal
and interest you will pay back each month. This makes it easier to budget and make
financial plans.

As an illustration above, if I needed Php1 million to start up my business venture, 40% of

my Capital Stocks will be sold to outsiders to raise a Php400,000 fund. The 40% limit is
designed to protect my controlling interest in the company and avoid the following scenario
as follow:

1. Share profit. Your investors will expect – and deserve – a piece of your profits.

2. Loss of control. The price to pay for equity financing and all of its potential advantages
is that you need to share control of the company.

3. Potential conflict. Sharing ownership and having to work with others could lead to some
tension and even conflict if there are differences in vision, management style, and ways
of running the business. It can be an issue to consider carefully.

The remaining funds of Php600,000 will be sourced through debt financing, it is to be noted
that 100% reliance on debt financing is not advisable due to the following reasons:

1. Qualification requirements. You need a good enough credit rating to receive financing.

2. Discipline. You’ll need to have the financial discipline to make repayments on time.
Exercise restraint and use good financial judgment when you use debt. A business that
is overly dependent on debt could be seen as ‘high risk’ by potential investors, and that
could limit access to equity financing at some point.

3. Collateral. By agreeing to provide collateral to the lender, you could put some business
assets at potential risk. You might also be asked to personally guarantee the loan,
potentially putting your own assets at risk.

In the end, it is not advisable to put all eggs in one basket. We need to be conservative and
spread the risk of financing between debt and equity.