Debt vs. Equity — What's the Difference?
By Tayyaba Rehman — Updated on September 15, 2023
Debt refers to borrowed money to be repaid, usually with interest. Equity represents ownership in a company, often via shares.
Difference Between Debt and Equity
Table of Contents
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Key Differences
Debt and equity are two principal methods of raising capital for businesses, but they fundamentally differ in nature. Debt is essentially money borrowed, typically in the form of loans, bonds, or credit. When a company or individual takes on debt, they're required to repay the principal amount along with interest over time. So, for businesses, debt financing means borrowing money with the promise to repay lenders as per agreed terms.
Equity, in contrast, pertains to ownership. In a business context, equity financing involves selling shares or stock in the company. When investors purchase these shares, they're buying a piece of the company, making them shareholders. Unlike debt, which is an obligation to repay, equity does not need to be paid back. Instead, shareholders benefit from dividends and the potential appreciation of their shares.
A notable distinction between debt and equity lies in the risk and reward dynamics. Debt must be repaid regardless of a company's performance, making it a fixed liability. However, in the case of bankruptcy, debt holders are prioritized over equity holders during asset liquidation. On the other hand, equity shareholders bear higher risks, as they're last in line during liquidation. But they stand to gain more if the company thrives.
Another difference revolves around the influence on company operations. Debt doesn't grant lenders any direct say in the company's affairs, beyond the terms of the loan agreement. Equity shareholders, particularly those with significant holdings, may influence company decisions, sometimes through voting rights.
Comparison Chart
Nature
Borrowed money with promise of repayment
Ownership in a company
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Return
Interest
Dividends and potential share appreciation
Risk
Fixed liability, but prioritized during liquidation
Last during liquidation, but unlimited upside
Influence on Company
Limited to loan terms
May have voting rights or influence decisions
Duration
Defined period (until repayment)
Indefinite (as long as one holds the shares)
Compare with Definitions
Debt
Money borrowed that needs to be repaid.
The company has a debt of $2 million from its recent loan.
Equity
Ownership interest in a company, typically via shares.
He acquired 5% equity in the tech startup.
Debt
A sum of money owed for goods or services.
The total debt from the shopping spree was $500.
Equity
The difference between assets and liabilities.
Homeowners often aim to increase their home equity.
Debt
Financial instruments like bonds, representing money borrowed.
Many investors buy corporate debt to receive regular interest payments.
Equity
Fairness and impartiality.
The judge decided the case with a sense of equity.
Debt
The state of owing money.
After years of spending, he found himself in deep debt.
Equity
Capital raised by a firm through the sale of shares.
The company raised substantial equity during its initial public offering.
Debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase.
Equity
The state or quality of being just and fair.
Debt
Something owed, such as money, goods, or services
Used the proceeds to pay off her debts.
A debt of gratitude.
Equity
Something that is just and fair.
Debt
An obligation or liability to pay or render something to someone else
Students burdened with debt.
Equity
Justice achieved not simply according to the strict letter of the law but in accordance with principles of substantial justice and the unique facts of the case.
Debt
The condition of owing
A young family always in debt.
Equity
See court of equity.
Debt
Financial instruments, such as bonds, mortgages, and loans, that represent a claim to payment and rights of creditorship
Invested in government debt.
A company issuing debt.
Equity
An equitable right or claim
An analysis of the equities and inequities brought about by the current trade bill.
Debt
A moral or legal obligation to make reparations or undergo punishment for committing an offense
A criminal repaying his debt to society.
Equity
Ownership interest in a corporation, property, or other holding, usually calculated as the value of the holding after subtracting any debt or liabilities.
Debt
An action, state of mind, or object one has an obligation to perform for another, adopt toward another, or give to another.
Equity
Equities Shares of common stock or preferred stock.
Debt
The state or condition of owing something to another.
I am in your debt.
Equity
The value of a brand's reputation.
Debt
(finance) Money that one person or entity owes or is required to pay to another, generally as a result of a loan or other financial transaction.
Equity
Representing an ownership interest
An equity stake.
Debt
(legal) An action at law to recover a certain specified sum of money alleged to be due
Equity
Of or relating to stocks
An equity mutual fund.
Debt
That which is due from one person to another, whether money, goods, or services; that which one person is bound to pay to another, or to perform for his benefit; thing owed; obligation; liability.
Your son, my lord, has paid a soldier's debt.
When you run in debt, you give to another power over your liberty.
Equity
Subordinated to all other claims on income, earnings, or assets
The equity tranche.
Debt
A duty neglected or violated; a fault; a sin; a trespass.
Equity
Fairness, impartiality, or justice as determined in light of "natural law" or "natural right".
Debt
An action at law to recover a certain specified sum of money alleged to be due.
Equity
(legal) Various related senses originating with the Court of Chancery in late Medieval England
Debt
The state of owing something (especially money);
He is badly in debt
Equity
(legal) The power of a court of law having extra-statutory discretion, to decide legal matters and to provide legal relief apart from, though not in violation of, the prevailing legal code; in some cases, a court "sitting in equity" may provide relief to a complainant should the code be found either inapplicable or insufficient to do so.
Debt
Money or goods or services owed by one person to another
Equity
(legal) A right which accrues to a party in a transaction because of the nature of the transaction itself, and which is exercisable upon a change of circumstances or conditions; in other words, an equitable claim.
Debt
An obligation to pay or do something
Equity
The body of law which was developed in the English Court of Chancery, which Court had extra-statutory discretion, and is now administered alongside the common law of Britain.
Debt
An obligation to pay or do something for someone.
She felt a debt of gratitude for the help she received.
Equity
(finance) Various senses related to net value
Equity
Value of property minus liens or other encumbrances.
Home equity
I have a lot of equity in my house.
Equity
(business) Ownership, especially in terms of net monetary value of some business.
Equity
(accounting) Ownership interest in a company as determined by subtracting liabilities from assets.
Equity
(poker) A player's expected share of the pot.
Equity
(nonstandard) Equality
Equity
Equality of rights; natural justice or right; the giving, or desiring to give, to each man his due, according to reason, and the law of God to man; fairness in determination of conflicting claims; impartiality.
Christianity secures both the private interests of men and the public peace, enforcing all justice and equity.
Equity
An equitable claim; an equity of redemption; as, an equity to a settlement, or wife's equity, etc.
I consider the wife's equity to be too well settled to be shaken.
Equity
A system of jurisprudence, supplemental to law, properly so called, and complemental of it.
Equity had been gradually shaping itself into a refined science which no human faculties could master without long and intense application.
Equity
The difference between the market value of a property and the claims held against it
Equity
The ownership interest of shareholders in a corporation
Equity
Conformity with rules or standards;
The judge recognized the fairness of my claim
Equity
The value of a property beyond any owed amounts.
After paying her mortgage for years, her equity in the house grew significantly.
Common Curiosities
What's the primary difference between debt and equity?
Debt is borrowed money to be repaid, while equity represents ownership in a company.
Is debt always bad for a company?
Not necessarily; manageable debt can leverage growth, but excessive debt can be risky.
Which is riskier for investors: debt or equity?
Generally, equity is riskier but offers potentially higher returns, while debt is more stable but with limited returns.
What's the benefit for shareholders in equity?
Shareholders can receive dividends and potential appreciation in share value.
Does equity have to be repaid like debt?
No, equity represents ownership and doesn't need to be repaid like a loan.
Do companies prefer debt or equity financing?
It varies based on company strategy, market conditions, and financial health.
Can equity change over time?
Yes, equity can change with company performance, stock issuance, or buybacks.
Can an individual have equity in something?
Yes, individuals can have equity in properties, investments, or any asset minus owed amounts.
Which has more influence on company decisions: debt or equity?
Equity holders, especially significant ones, often have more direct influence through voting rights.
Can a company operate without debt?
Yes, many companies operate without debt, but leverage can sometimes optimize capital structure.
What happens to debt during a company's bankruptcy?
Debt holders are prioritized over equity holders during asset liquidation.
Do equity shareholders always receive dividends?
No, dividends depend on company profitability and board decisions.
How does debt affect a company's balance sheet?
Debt appears as a liability, impacting the company's leverage and financial ratios.
Are bondholders considered equity holders?
No, bondholders are debt holders and have different rights and priorities.
What determines the cost of debt for a company?
Factors like creditworthiness, interest rates, and loan terms determine the cost of debt.
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Written by
Tayyaba RehmanTayyaba Rehman is a distinguished writer, currently serving as a primary contributor to askdifference.com. As a researcher in semantics and etymology, Tayyaba's passion for the complexity of languages and their distinctions has found a perfect home on the platform. Tayyaba delves into the intricacies of language, distinguishing between commonly confused words and phrases, thereby providing clarity for readers worldwide.
