Evaluate debt capital versus equity capital as methods of financing expansion for a business. - Leaving Cert Business - Question 5 C - 2012

Debt capital requires fixed interest repayments, regardless of the business's profitability. For example, businesses have obligations to pay interest on debentures or fixed dividends on preferred shares. On the other hand, equity capital does not impose such obligations. Dividends are paid at the discretion of the business, meaning in profit periods, dividends can be substantial, but in tough times, they can be minimized or skipped altogether.

Debt capital is associated with higher risk, as it increases the business's liabilities. If a business takes on too much debt, it may face bankruptcy if unable to meet repayment obligations. Equity financing, however, poses less risk because repayment is not mandatory. Here, the risk is spread among all shareholders, making the business less likely to go bankrupt due to creditor pressures.

Obtaining debt capital often requires providing collateral, which can be challenging for startups or smaller businesses lacking substantial assets. In contrast, equity financing typically does not require any security as it involves raising funds in exchange for shares in the company.

Interest repayments on debt capital are tax-deductible, which provides a financial advantage. Conversely, dividends paid to shareholders are not tax-deductible, making equity financing less tax-efficient.

In summary, both debt and equity capital have their advantages and disadvantages. Debt capital is best for maintaining control and can offer tax benefits but carries risks and liability. Equity capital provides greater flexibility in repayment and less financial strain but involves sharing control and profits. The choice depends on the specific circumstances, goals, and financial health of the business.