Alan Pink looks at some considerations when deciding whether a company should be financed by share capital or a loan.
Superficially, the two methods of financing a business by equity or debt look fairly similar. In both cases, the investor pays money over to the business, and in return gets an asset which is ultimately repayable to the investor.
An important distinction
However, looking deeper, there is a fundamental difference between the two, to such an extent that the distinction is one which accountants and financial analysts get quite steamed up about. These key differences are all about the different ways in which the financial health of the business is assessed, as will be highlighted when considering the effect of the distinction on a company’s profit and loss account and balance sheet.
