What Is the Difference Between Debt and Equity Financing?

Debt financing refers to companies that raise working capital or capital expenditures by selling bonds or notes to individual or institutional investors. Individual or institutional investors lend funds to become creditors of the company and obtain the company's commitment to repay principal and interest. The financing decisions of enterprises all take financing channels and financing costs into consideration, so a series of financing theories have emerged.

Debt Financing

The constraints of debt financing on managers are mainly manifested in the following four aspects:

(1) The company's debt financing will reduce the company's investment capacity, control its unlimited investment impulse, and protect the interests of investors. When the company has a large operating surplus, shareholders generally hope to use the surplus funds to

Debt financing refers to loans through banks or non-bank financial institutions or

Corporate debt financing generally comes in the form of bank loans and corporate bonds. As an important tool for corporate debt financing, corporate bonds and bank loans differ greatly in terms of financing costs and comprehensive impact. If a company intends to finance debt with a large scale and a long maturity, it is more advantageous to choose to issue corporate bonds than bank loans. The specific comparative analysis is as follows:

I. Comparative analysis of financing costs As far as corporate bonds are concerned, the financing costs mainly include the interest paid to investors and the costs related to the issuance (including underwriting, rating, announcement, legal consulting, custody, evaluation and auditing and other expenses). For bank loans, the financing cost is mainly the interest paid to the bank and the loan handling fee. However, because corporate bond issuance rates generally adopt a fixed interest rate and remain unchanged during the bond's duration, it is beneficial for the company to lock in financing costs; while bank loans implement a floating interest rate, which rises with the benchmark interest rate during the debt's duration. However, the floating cost is very high, and the actual actual financing cost may be greater than the financing cost of issuing corporate bonds in the future, which is not conducive to the company's lock-in financing cost. Therefore, from the perspective of excluding the risk of future benchmark interest rate fluctuations and locking up the company's funding costs, the company has more advantages in issuing corporate bonds than bank loans.

2. Comprehensive comparative analysis Since 2005, the State Council has clearly proposed to vigorously develop the corporate bond market and promote the transition from indirect financing to direct financing. As a debt financing tool, corporate bonds will be an important breakthrough in the development of direct financing, that is, companies are encouraged to issue bond financing to replace the original bank loans. We expect that during this transformation, a large number of bank loans will be provided for enterprises. Many alternatives to bonds. Moreover, with the increasing awareness of corporate costs, direct financing has been recognized and favored by more and more enterprises. At the same time, with the continuous growth of the bond institutional investor team, the bond market has shown a booming supply and demand situation.

To sum up, corporate bond financing is large in scale, long in term and can lock in costs, and has become one of the important financing methods for large-scale infrastructure construction projects. Second, issuing corporate bonds can also expand a new financing channel for the company and improve Financial structure to avoid the financial risks brought by solely relying on bank loans; Finally, issuing corporate bonds is also a shortcut to establish a good corporate image and improve corporate visibility, which will lay a solid foundation for the company's continued financing in the capital market in the future and will also become an enterprise A model for leveraging the bond market to promote its own development. Therefore, issuing corporate bonds is the best choice for debt financing for municipal infrastructure construction companies.