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.
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