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 is that equity financing carries no repayment obligation and provides extra working capital that can be used to grow a business.
Companies usually have a choice as to whether to seek debt or equity financing. The choice 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 successful and provide equity investors a good return on their investment, but without 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 restrictions on the company's activities that may prevent it from taking advantage of opportunities that lie outside the realm of its core business. Creditors look favorably upon a relatively low debt-to-equity ratio, which benefits the company if it needs to access additional debt financing in the future.