The Key Difference Between Debt vs Equity Financing

debt financing vs equity financing
Feature	Debt Financing	Equity Financing
Definition	Raising capital by borrowing money that must be repaid with interest.	Raising capital by selling ownership shares in the company.
Ownership Impact	No ownership dilution; lender is not an owner.	Ownership is diluted as new shareholders gain equity.
Repayment	Requires regular interest payments and principal repayment.	No repayment obligation; investors expect dividends and capital gains.
Cost	Interest payments are a fixed cost.	Cost of equity may be higher due to expected returns by investors.
Risk	Company faces financial risk due to debt obligations.	Risk is shared with shareholders; less financial pressure.
Control	Lenders have no control over business decisions.	Shareholders can influence company decisions via voting rights.
Tax Treatment	Interest payments are tax-deductible.	Dividends are not tax-deductible.
Impact on Credit Rating	Increasing debt can lower credit rating if excessive.	No direct impact on credit rating.
Suitability	Best for companies with stable cash flow to service debt.	Suitable for startups or companies needing growth capital.
Examples	Bank loans, bonds, lines of credit.	Issuing common stock, preferred shares.