Answer to Question #311640 in Accounting for Joel

Question

1. You are about to buy a business that is worth $200,000, but you do not have enough money to purchase the business entirely. You have a total of $90,000 in savings and you are looking at different financing options. Provide information for the following:  

• Explain the advantages of equity financing and debt financing
• Explain the disadvantages of equity financing and debt financing
• Provide an example of equity financing 
• Provide an example of debt financing 
• Explain which type of long-term liability financing you would choose to buy the business?

Answer 1

1.) Advantages

Equity financing

Cheap source of capital

Owner does not incur additional costs.

No security needed

Debt financing

Tax reduction/saving

Leverage

Supports big projects

2.) Disadvantages

Equity financing

Owner does not benefit from tax reduction

Debt financing

It is costly

Requires security

3.) Example of equity financing

Owners shares invested, cash or assets

4.) Example of debt financing

Bank loan

5.) I would choose a bank loan and use the business as a security. It is easier compared to other sources.