It is important to know the difference between lease purchase and lease option. The use of leases can also have an impact on a company’s liquidity profitability ratios (Schroeder, Clark, & Cathey, 2005). First the organization should study the expenses of what it would cost to lease as to what it cost to purchase this can be done with a reduced cash flow evaluation. The study would compare the expense of the alternatives by taking into account the scheduling of payments, tax benefits, and interest rates on any loans, and other financial arrangements. To make an evaluation, the company has to be sure about the financially viable lifespan of equipment, this would also include the salvage value and depreciation of such equipment. Here is a brief description of what debt financing is referred as. Debt financing is when money is borrowed by an organization and has to be repaid back with interest. Debt financing does dilute the ownership of the company.
Debt financing can be looked at as either a long-term debt or short-term debt. Two examples of debt financing are the issue of Bonds and a Line of Credit. Line of Credit is a bank loan where a company can draw out funds when times are slow, and money is needed. Bonds can be issued as form of debt financing. Bonds are usually long-term and come with a maturity ranging from seven to 30 years. These bonds are usually underwritten by a bank or securities firm who assist in the sales of these bonds. Equity financing is another method of raising money by selling company stock to outside investors. In return for their interest in buying stock, the shareholder receives ownership interest in the company.
An advantage to using debt is that the debt helps to produce and hold greater investment returns for the company’s equity holders. When using debt financing the primary advantage is that it allows the founders to hold ownership and control of the company. The disadvantage to this is that it requires smaller business to make monthly payments of both principal and interest. The use of capital structure depends on what a company can afford some small companies cannot afford debt financing like larger corporations. I think equity financing is a good way for smaller companies to raise capital because the owner can still hold on to control and raise money at the same time.
Schroeder, R.G., Clark, M.W., & Cathey, J.M. (2005). Financial Accounting Theory and Analysis (8th Ed.). Hoboken, New Jersey: John Wiley & Sons.