Differences between Debt Finance and Ordinary Share Capital (Equity Finance)

Debt finance is a fixed return finance as the cost (interest) is fixed on the par value (face value of debt). It is ideal to use if there’s a strong equity base. It is raised from external sources to qualifying companies and is available in limited quantities.

Ordinary share capital – this is raised from the public from the sale of ordinary shares to the shareholders. This finance is available to limited companies. It is a permanent finance as the owner/shareholder cannot recall this money except under liquidation. It is thus a base on which other finances are raised.

 

Differences between Debt Finance and Ordinary Share Capital (Equity Finance)

Ordinary share capital

  • It is a permanent finance
  • Return paid when available
  • Dividends are not tax allowable
  • Unsecured finance
  • Carry voting rights
  • Reduces gearing ratio
  • No legal obligation to pay
  • Has a residue claim
  • Owners’ money

Debt

  • It is refundable (redeemable)
  • It is fixed return capital
  • Interest on debt is a tax allowable expense
  • Secured finance
  • No voting right
  • Increases gearing ratio
  • A legal obligation to pay
  • Carries a superior claim
  • Creditors finance.

Differences between Debt Finance and Ordinary Share Capital (Equity Finance)

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