What is the best reason for a company to choose debt over equity financing?

What is the best reason for a company to choose debt over equity financing?

• A. Debt is always less expensive
• B. Debt maintains ownership control
• C. Debt provides tax benefits
• D. Debt is easier to acquire

Answer: (B)

Choosing debt over equity financing primarily allows a company to maintain ownership control. When a company opts for debt financing, it borrows funds that need to be repaid with interest, but it does not issue additional shares of stock. As a result, current shareholders retain their ownership percentage and control over the company’s operations and decisions. This aspect is particularly attractive to business owners or founders who are concerned about diluting their ownership stake, which often occurs with equity financing when new shares are issued. By utilizing debt, the company ensures that existing shareholders retain their voting power and influence within the company, which is crucial for those who want to maintain their vision and strategy without external interference. While it's true that debt can provide tax benefits and may be easier to acquire in certain situations, those are secondary considerations. The significant advantage of debt, particularly for businesses wary of losing control or decision-making power, is that it enables them to secure necessary capital while preserving ownership.

Choosing debt over equity financing primarily allows a company to maintain ownership control. When a company opts for debt financing, it borrows funds that need to be repaid with interest, but it does not issue additional shares of stock. As a result, current shareholders retain their ownership percentage and control over the company’s operations and decisions.

This aspect is particularly attractive to business owners or founders who are concerned about diluting their ownership stake, which often occurs with equity financing when new shares are issued. By utilizing debt, the company ensures that existing shareholders retain their voting power and influence within the company, which is crucial for those who want to maintain their vision and strategy without external interference.

While it's true that debt can provide tax benefits and may be easier to acquire in certain situations, those are secondary considerations. The significant advantage of debt, particularly for businesses wary of losing control or decision-making power, is that it enables them to secure necessary capital while preserving ownership.