The appropriate ratio of debt to equity is vital in
financial structuring of an infrastructure project. Debt financing means borrowing for a
particular project with provisions for repayment with interest. In equity
financing, the capital is either invested by the stakeholders or by raising
money via selling interests in the company (stocks/bonds).
Comparison
Equity need not be paid
back while debt has to be. Additionally equity ownership adds credibility to a
venture while high debt projects are considered to be risky. In debt financing, the lender has no
claim on the profits generated as opposed to equity owners. And the interest on loans is tax deductible
thus providing a tax shield. Furthermore, actions taken by the
company need not undergo clearance from the lender as opposed to voting from
equity holders for approval (Thomson Reuters,
2013). On the other hand the advantages of equity financing cannot
be over emphasized. It adds to the net worth of the venture providing financial
strength and preserves the borrowing capacity for future needs ( Ebi Ofrey, 2011).
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| Figure 1: Growth: Debt Vs Equity Financing (Sweeney, 2013) |
Both debt and equity have
their pros and cons. It is up to the stakeholders in the business venture to
analyze and arrive at the option that best suits their needs. Figure 1 (Sweeney, 2013)
gives a graphical representation of expected growth via debt and equity
financing. Hence, debt financing would be appropriate for business owners who
do not want to dilute ownership, have limited ability to raise equity, or share
future profits (Sweeney, 2013).
