A:

Most companies use a combination of debt and equity financing, but there are some distinct advantages of equity financing over debt financing. Principal among them are the fact that equity financing carries no repayment obligation and that it provides extra working capital that can be used to grow a company's business.

Companies usually have a choice as to whether to seek debt financing or equity financing. The choice most often depends upon which source of funding is most easily accessible for the company, its cash flow and how important maintaining control of the company is to its principal owners. The debt to equity ratio shows how much of a company's financing is proportionately provided by debt and equity.

The main advantage of equity financing compared to debt financing is that there is no obligation to repay the money acquired through equity financing. Of course a company's owners want it to be very successful and provide equity investors a good return on their investment in the company, but there are no required payments or interest charges as is the case with debt financing. Equity financing places no additional financial burden on the company. Since there are no required monthly payments associated with equity financing, the company has more capital available to invest in growing the business.

Debt financing sometimes comes with some restrictions on the company's activities that may prevent it from taking advantage of opportunities that lie outside the realm of its core business. A relatively low debt to equity ratio is looked upon favorably by creditors and will benefit the company in the event that it needs to access additional debt financing at some point in the future.

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