What is the primary difference between equity and debt financing?

The primary distinction between equity and debt financing lies in the nature of ownership and the relationship with investors. Equity financing involves raising capital by selling ownership shares in the company. Investors who purchase these shares become partial owners and participate in the company's decisions and potential profits or losses. Unlike debt financing, which requires repayment with interest, equity does not obligate the company to repay the capital raised, and shareholders benefit in terms of dividends and appreciation in share value rather than fixed interest payments.

Understanding this fundamental difference is crucial as it impacts how a company manages its capital structure and the financial obligations it incurs. Equity financing can be beneficial for startups and companies looking to grow without the immediate burden of debt.