1) Flexible equity financing. Whether an enterprise distributes dividends after issuing shares mainly depends on its profitability and financial situation. When the cash flow is difficult, the enterprise may not distribute cash dividends or stock dividends, or even any form of dividends. There is no need for the company to repay the stock when it expires.
2) The capital raised by equity financing is permanent. Equity capital is the most basic source of funds for enterprises, which can enhance their debt capacity and easily absorb funds.
Disadvantages of equity financing:?
1) has the risk of affecting the investment proportion of investors or transferring the control right of enterprises. Joint-stock enterprises raise long-term capital by issuing additional shares, which may affect the shareholding ratio of the original shareholders, thus affecting their control ability or authority over the enterprise.
2) The cost of equity financing is high. When the profit rate of enterprise assets is higher than the long-term debt interest rate, the owner can enjoy the residual surplus.
3) Enterprises that adopt equity financing do not enjoy preferential tax treatment. The dividend payment generated by issuing stock financing needs to be paid after paying income tax, and enterprises will not enjoy the tax deduction of debt financing interest.
Advantages of debt financing:
1) Equity investors can maintain their investment ratio. Raising long-term capital through debt financing will not affect the shareholding ratio of the original shareholders, nor will it affect their control ability.
2) Enterprises adopt debt financing, so the debt repayment pressure is small. Creditors have no other rights and obligations except the right to recover the principal and interest on time.
3) Interest expenses of debt financing can be tax-free. Interest arising from borrowing debts can be deducted before paying income tax, thus reducing the cash outflow of enterprises.
Disadvantages of debt financing:
1) Debt management has high financial risks and lacks financial flexibility. The interest of debt financing is a long-term fixed expenditure that the enterprise must bear according to the contract and must repay when it expires.
2) Business decisions of enterprises, especially financial policies, are often bound and restricted by debt contracts.
3) Debt financing has changed the capital structure of enterprises, thus reducing their future borrowing capacity.
Equity financing is realized by expanding all the rights and interests of enterprises, such as attracting new investors, issuing new shares and adding investment. The consequence of equity financing is not to sell all the rights and interests, nor to sell stocks, but to dilute the original investors' control over the enterprise. ? The main channels of equity capital are self-owned capital, relatives and friends or venture capital companies. In order to improve the operation or expand the scale, the franchisor can use various equity financing methods to obtain the required capital.
Debt financing is an inevitable choice for enterprises to raise funds under the condition of market economy. However, this financing method brings huge benefits to enterprises, but also brings some potential risks. It is generally believed that enterprises can maximize their value only under the optimal capital structure. From the financial point of view, this paper analyzes the positive and negative effects of debt financing in order to enlighten the determination of the optimal capital structure of enterprises.