1. Debt means obligation.2. The company who borrowsmoney fromthe investors to raise the capital is obliged to the coupons and finite intervals and pay back the Pricipal amount at the end of tenure.3. Debt holders are likeMoney lenders.4. Raising Captial using Dept is a burden to the Company as they have to pay the interest monthly.5. Coupon or Monthly Interest is earned by the investors.6. Investment inDebt is less riskier compared to Equity.7. Returns are periodic and almost fixed.Equity

1. Equity means ownership.2. Everyone who owns the Equity is part owner of that company. He/She can also influence the decision.3. Equity holders are owners of the company.4. Raising Capital using Equity is that the Company who issues shares need not pay anymoney tothe share holders.5. Investor only earns when Company issues dividends (it happens when the Company wants to share the profit to their shareholders).6. Investment inEquity is risky compared to Debt.7. Returns are only when selling of share happens or dividends are issued. Returns are not fixed.

Debt and Equity are the terms usedin Finance. They aretypes offinancing in Business. Even though both are termsin Finance. Both are used tomake money by investingin them, but both have lots of Differences. Knowing theDifferences Between Debt and Equitywill help investors to invest their portfolio properly.

Share vs StockIn common parlance, share means a portion or part of something. It is often a share of ones earning, profit oritcan be a share of sorrows, depending on the context. Once can also share physical or fiscal burden in a task.Likewise, stock refers to accumulated or stored substance. conventionally victuals or grains. It can be stock of any commodity. A nation may talk of buffer stocks. It refers to the nations granary and means how much food grains a country has in reserve to tide over a crisis, or to meet the demand in a shortage situation.But in the modern world, specially afterthe Industrial Revolution, stocks have come to meancompany sharessoldon the stock market. Just a reminder, NYSE, the New York Stock Exchange (NYSE) came into vogue over 200 years ago.After generic meanings, let us look at these two words as they operate in a market situation.In todays financial markets, the distinction betweenstocks and shareshas been somewhat blurred. Generally, these words are used interchangeably to refer to the pieces of paper that denote ownership in a particular company, calledstock certificates. However, the difference between the two words comes from the context in which they are used.For example, stock is a general term used to describe the ownership certificates of any company, in general, and share refers to a the ownership certificates of a particular company. So, if investors say they own stocks, they are generally referring to their overall ownership in one or more companies. Technically, if someone says that they own shares the question then becomes shares in whichcompany?Bottom line,stocks and sharesare the same thing. The minor distinction betweenstocks and sharesis usually overlooked, and it has more to do with syntax than financial or legalaccuracy.Were talking about owning stocks. This fabulous category of financial instruments is, without a doubt, one of the greatest tools ever invented forbuilding wealth.Stocks area part, if not the cornerstone, of nearly any investment portfolio. When you start on your road to financial freedom, you need to have a solid understanding of stocks and how they tradeon the stock market.The Definitionof a Stock: Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on the companys assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Whether you say shares,equity, or stock, it all means the same thing.Holding a companys stock means that you are one of the many owners (shareholders) of a company and, as such, you have a claim (albeit usually very small) to everything the company owns. Yes, this means that technically you own a tiny sliver of every piece of furniture, every trademark, and every contract of the company. As an owner, you are entitled to your share of the companys earnings as well as any voting rights attached to the stock.Some people consider preferred stock to be more likedebtthan equity. A good way to think of these kinds of shares is to see them as being in between bonds and common shares

Difference between Debt and Equity ProductsWhat is equity?Equity refers to part ownership in a company, and in the Indian context equity and shares are used inter-changeably.So, if OneMint were a company that had 100 shares in the market, and if you bought 1 share of OneMint you would be the owner of 1% of OneMint.If OneMint was valued at 1 lakh rupees today, then your share would be worth Rs. 1,000.If 5 years from now OneMint were valued at Rs. 10 lacs then your share would be worth Rs. 10,000.If however, the company went bankrupt then your share would be worth nothing. Equity products are generally considered to be high risk high return products for this reason.Examples of equity products:Shares:Shares trading on the stock exchange are the most direct examples of equity products.Equity Mutual Funds:Mutual funds that own shares are another example of equity products.ELSS mutual fundsthat are eligible for80C tax savingsare a popular example of equity mutual funds.Equity based ETFs:ETFs that are based on shares like Nifty Index Funds are also an example of equity products.What is debt?Debt is loan, and carries a fixed rate of interest, and a promise to repay. Debt is generally safer than equity, and there is generally no upside in it. You get paid the promised interest, and as long as the company (or country) is not bankrupt youre safe.For example OneMint could issue debt of Rs. 1 lac at an interest rate of 15% per annum, and as long as OneMint is not bankrupt you can expect your interest repayment, and also the repayment of your principal.If OneMint goes bankrupt, then first the shareholders are wiped out, which means that your shares in OneMint are worth nothing now, and then the debt is paid off according to the hierarchy of creditors.A secured debt is debt that is secured against a collateral like a building, land, machinery etc. and they have a higher repayment priority than an unsecured debt, which is not secured against any collateral.Examples of debt products:Fixed Deposits with banksare the prime example of debt products. They are extremely safe investments, which have a pre-determined interest rate. The stock of SBI may have wild swings but your fixed deposit with SBI is safe, and wont be affected till something really serious happens.Infrastructure bondsthat have recently been launched are another type of debt product as they pay you a fixed interest rate, and the principal is protected as well. They are not as safe as bank fixed deposits, but if any infrastructure company defaults on their debt that would be an exception rather than the norm.FMPs These are a special type of mutual funds that have become popular in the past few years, and work like fixed deposits (though not as safe as them). They have become popular due to favorable tax treatment when compared with a fixed deposit, so people dont mind taking the little bit of extra risk.POMIS:Post Office schemes are also debt schemes as they pay a fixed interest, and are also guaranteed. These are very safe instruments.Provident Funds:This is also a debt product, which is quite safe and pays a fixed rate of interest.These are some of the key things that come to my mind when explaining the difference between a debt and an equity product feel free to add anything that I have missed, and as always comments are welcome.Business owners may have some trepidation about borrowing from a financial institution, as it means relinquishing some cash profits. But it could be a good option so long as you expect to have sufficient cash flow to pay back the loans, plus interest. The major benefit for debt financing, unlike with equity financing, you'll retain full ownership of your business. The interest on business loans is also tax-deductible, and youll build your credit.Small businesses frequently take bank loans. They are usually easy to obtain so long as you have good credit, enough equity to cover the payments and you're not already carrying heavy debts. These loans are generally granted either on a short-term basis of less than one year or long-term basis of more than one year.If you want to raise $100,000 or less, you may be able to receive a bank loan based on your personal credit. This is called an unsecured loan. Secured loans are granted in larger amounts. Banks usually expect you to put up assets to back the loan. These assets could include property, your personal investments, equipment or other tangible holdings that the bank could seize if you default on the loan.Commercial finance companies also lend money and are willing to fund riskier ventures that don't have solid financials. But this type of funding usually comes with high interest.Equity FinancingSmall business owners when weighing debt and equity financing options often opt for equity financing because they have concerns about either qualifying for a loan or having to channel too much of their profits into repaying the loan. Investors and partners can provide equity financing, and they generally expect to profit from their investments. No debt payments means more cash on hand. Moreover, if no profit materializes, you arent obligated to pay back equity contributions.The major drawback of equity financing is that you are no longer the full owner of a business once you have other financial contributors who expect a share. As such, you will be relinquishing not just financial control, but will no longer be the sole arbiter of the businesss creative and strategic direction.There are also so-called angel investors: wealthy individuals or networks that are willing to fund small businesses. Angels are the largest source of seed and start-up capital for businesses, investing $25.6 billion in businesses in 2006, according to the Center for Venture Research at the University of New Hampshire. Angel investors tend to fund small businesses for longer periods of time and expect a lower return on investment than do venture capital firms.Venture capital firms, on the other hand, provide equity for businesses and expect high returns on their investments within three to five years. They generally fund companies with significant growth potential -- Microsoft and Google attracted VC funding -- not small businesses.Most businesses have a mix of debt and equity financing. Too little equity could prevent you from securing or repaying loans, while carrying little or no debt could indicate that you are too risk-averse, and that your business might not grow as a result. Check with your industry association to find the average debt-to-equity ratio for your sector.As an SME, whether you are a start-up or running a business for some time, you need cash flow to expand your business. As a business owner, you have two options to choose to secure financing for your business: debt financing and equity financing.These are two very different financing options having their own advantages and disadvantages. They also have very different implications on your business. So we will discuss these two common financing options in this article and help you to decide the ideal option for your business.

What is debt financing?Debt financing means borrowing money from a lending firm, usually a bank or financial institution. You need to repay the money within a specific period of time, with interest. The lender does not get any ownership or say in your business as long as you repay the loan on time as per the agreed repayment schedule. Generally, for small business, debt financing can be obtained by providing collaterals or personal assets of the business owners. The repayment tenure is 3 to 5 years.What is equity financing?Equity financing means getting money from an investor in exchange of a percentage of ownership of your business. In this funding option, you do not incur any debt, so you do not have to repay anything. But you need to share your business profits with the investor time to time. Also, you would need your investors go-ahead before you implement major business decisions, be it financial decision or operational decision.In which scenarios I should take debt?Debt is a good option of getting funding in the following cases: You have some good collaterals or personal assets like lands etc. In these cases you can get debt funding easily. You do not need a very high amount of money for your business You need money urgently to invest in your business as your business is growing fast. Debt usually takes 1 to 2 months to procure. You need complete ownership of your business and freedom of taking decisions You are confident of generating necessary cash flow in the future to repay off the loan as per the repayment schedule.Debt financing is an easy option for SMEs to generate funding quickly. In fact, under some Government schemes designed for SME, you can get a debt of 50 lakhs to 1 Cr without any collateral. You can take advantage of such schemes.If you are sure about paying a debt on time, you can get good credit rating which in turn can help you to get similar funding easily next time. So its better to take an amount of debt, which you are sure to repay off.The amount of debt you can get is dependent on the amount of collateral you have, your current revenues and your future projections. You can get up to 50% of your collateral or 20-25% of your current turnover which is less. The future projections help the Bank to decide whether to fund you or not. There are also other types of funding where you can get money against bills or debtors.In which scenarios I should go for Equity?You should consider an equity funding option in the following cases: Youdo not have any assetsthat you can use as collaterals or you are unsure to give personal guarantees to the lender Your business is at a veryearly stageand so Banks are not comfortable to give you debt You need alarge amount of fundingcompared to your current earning from business Youdo not want to take any repayment obligationsor terms of paying high interest. If you have a business which does not yield cash flows immediately then Equity might be your only option. You are open to advices and at time involvement of investors who can potentially bring expertise and experience to run companies in similar industries. You are open to share your future profits from the business by giving some percentage of your business to investors.A good equity funding is comparatively easier to get for a new business than debt, but the process of identifying and contacting an investor to finally getting the cash in the system may take 3 to 6 months, or even more time. So, you can go for equity option if you have that patience to go through that process. Its also better to hire a professional company who can help you get in touch with a potential investor.The amount of equity fund you would receive is dependent on 4 parameters: growth stage of your company, revenue of your business, profit of your business and future growth prospects.If its a very early stage of business with no product development or operations in place, you may get funds at a valuation of Rs 1Cr to 5 Cr. If you have started the company recently, developed prototypes of your products or you have done some pilot projects, you may get anywhere between 3Cr to 10 Cr. If you have already started generating some revenue, you can fetch more than 5 Cr. If you are already running a business for a while, you may get a funding in multiples of your revenue.Why debt is cheaper than equity?In the short term, equity looks cheaper than debt, but the fact is, debt is cheaper than equity in long term.For example, you can take a Bank loan of Rs 1 Cr at a 15% rate of simple interest. So for every year you have to pay Rs. 15 lakhs as interest. So at the end of 5 years, you would pay in total of 1 Cr 75 lakhs for the debt taken.Compare that with equity. Say, your business has currently a valuation of 4 Cr and you want to take the same 1 Cr from an investor by giving 20% equity stake. Assuming your business will grow 3 times in next 5 years, after 5 years your business valuation would be 15 Cr. So that investors share would be 3 Cr.So, for the same amount, debt is cheaper than equity in the long run.How much you spend to get debt financing? You need to put up all required collaterals and personal assets to get a debt funding. It is usually difficult to arrange Debt Funding on our own. A Chartered Accountant, who helps you in doing all the processing and arrange the fund for you would charge around 2%- 3% of the fund raised. You also would need to pay around 12% 18% of interest depending on negotiation and the lenders perception of risk in funding your business. Typically a bank or financial institutions would charge higher interest rate from a start-up than a company who has shown cash flows and profit over a few years. You need to start paying back part of your principal after 1-2 years post you receive the fund.How much you spend to get equity financing? Your primary cost is the equity you give to the investor If you use investment banking firm to get an investor, they will charge around 2- 4% of the final funding amount that you are allotted from the investor. They might also charge some amount upfront to build your business plan and estimate your valuations.Overall, as we seen in this article, both debt and equity funding options have their own set of pros and cons and in many cases its a good idea to have a mix of debt and equity financing. Also how much funds you should raise, how much equity you should give, what sort of debt funding you should take are all difficult questions and needs the help of experts. Its better to hire a financial advisor firm who can give you valuable advices on when and which financing option to go forward.SMEJoinup.com works with many financial firms both debt and equity to help startups and SMEs get funded. Once you fill theService Request Form, we will give you a call. We will collect the information regarding your requirement, your business and most importantly your budget. We will then find the right financial advisors for you and connect you to the most suitable Financial Advisors.