When companies need to raise capital, for various reasons, they usually have a choice between two types of financing options:

  • Debt Financing, which involves the borrowing of money, and
  • Equity Financing, which involves selling a portion of owned company equity.

Factors to consider when making such a decision include

  • accessibility of the source of funding
  • existing cash flow and
  • how much control their owners are willing to give up.

Pros and Cons of Debt Financing

  • Clear and finite terms: exactly how much is owed, when it is owed and how long terms of loan repayment are. The payment amounts do not fluctuate month to month.
  • No lender gets involved in the company: day-to-day operations and administration are kept within the business owner/s domain, without any interference from outside parties.
  • Tax-deductible interest payments: debt financing interest payments can be deducted from the company’s taxable income.

However, cons include:

  • Repayment and interest fees, which can cost and build up.
  • Repayments start right next month, for which provisions must be made.
  • Risk of personal financial losses, such as personal credit score, personal property or previous investments in the business.

Pros and Cons of Equity Financing

  • Rapid scaling, when the financing is successfully obtained.
  • No repayment until the company turns a profit. If the venture fails, no repayment is required.

However, cons include:

  • Difficult to negotiate and obtain, requiring outstanding and appealing venture plans and foundation.
  • Involvement of investors in company operations, as financers have a legal stake and some control over how the company is run.

Types of Common Debt Financing

  • Traditional Bank Loans. Even though successful application comes with many conditions and preconditions, bank loans are considered viable options as interest rates are still favourable compared to that of alternative lenders.
  • Government Funding and Grants:
    • Soft Loan Schemes for Services Sectors
    • Soft Loan for SMEs
    • Tabung Usahawan Siswazah (TUS)
    • Young Entrepreneur Fund (YEF)
    • Tabung Pembangunan Pengangkutan Awam
    • Bumiputera Enterprise Enhancement Programme
    • SME Emergency Fund
    • Business Start-Up Fund (BSF)
    • TEKUN Financing
    • Skim Kredit Pengeluaran Makanan (SKPM)
    • Rural Economy Funding Scheme (SPED)
    • PROSPER Usahawan Muda (PUMA)

Types of Common Equity Financing

  • Angel investors: individuals with the financial means to provide a business with a significant amount of cash infusion. Angel investor are given a share of the company (equity) or convertible debt for their investment.
  • Venture capitalists: Entities, whether group or individual, that invest money into companies when they perceive growth potential offsetting their investment risks. In the long run, venture capitalists may decide to buy the company or become a major shareholder.
  • Equity crowdfunding: companies in need of financing small amounts of company shares to numerous investors via crowdfunding platforms. This option usually involves a lot of marketing and groundwork to hit the target funding.

Accounting Service in Malaysia

Managing debt and equity is truly an essential responsibility of running a successful business. To ensure that your business effectively keeps track of all monetary resources involved, efficient accounting and finance management must be well planned and accounted for.

When in doubt, consulting with a Malaysia accounting firm providing accounting service in Malaysia will save you extra cost or prevent incurring expensive errors in your books and finances.