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Debt Financing vs. Equity Financing

October 12, 2018 • 2 min read

Business owners often need to raise money in order to start, sustain or grow their companies. There are two main ways businesses can raise money outside of their daily operations: debt financing or equity financing.

How equity financing works

In equity financing, a company raises money by selling shares in its business to an outside investor. This investor effectively becomes a partner in the business and has an ownership stake in the company. If the company goes bankrupt both the investor and the company lose money. On the upside, the investor benefits from the future profits of the company. The downside for the business owner is that he or she has to give away a portion of their company – this could including potential business decisions and profit sharing.

How debt financing works

Debt financing on the other hand is when a business borrows money from a lender and agrees to pay back the funds in the future, with interest. Taking out a loan allows the business owner to keep ownership in his or her business – limiting upside for the lender but also protecting downside as well. If the borrower defaults on the loan, the lender gets paid back first, before the equity investor.

At Yieldstreet – we provide debt financing to deserving borrowers. We make sure that the loans are supported by a form of collateral – an asset that secures the investment in case of a default by the borrower. Check out our videos on asset based loans and collateral to learn more.

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