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AiProfessor · MBA — Finance · Equity vs Debt Financing NEP 2020 ✓
What's the difference between equity and debt financing?
AiProfessor
Before I explain, let me ask you this — imagine you're starting a chai franchise and you need ₹50 lakhs. You have two friends. One says 'I'll give you ₹50 lakhs but I want 40% ownership of your company forever.' The other says 'I'll lend you ₹50 lakhs, pay me back in 5 years with 12% interest.' Which would you pick?The loan I guess? Because I keep full ownership?
AiProfessor
Smart instinct. But what happens if your chai franchise has a terrible first year and makes zero profit?I still have to pay the loan back... with interest. That could bankrupt me.
AiProfessor
Exactly. Now what happens with the friend who took 40% ownership?He loses money too, but I don't owe him anything? We both just... take the loss?
AiProfessor
Now you see the tradeoff. Debt is cheaper when things go well — you keep all the upside and just pay fixed interest. But it's dangerous when things go badly because the repayment doesn't care about your profits. Equity is expensive when things go well — you're giving away a piece of every future profit forever — but it's safe when things go badly because your investor shares the risk. This is the fundamental tension in capital structure theory. Modigliani and Miller won a Nobel Prize arguing that in a perfect world, it wouldn't matter which you choose. But we don't live in a perfect world. Want to explore what makes the real world different?NEP 2020 principles in this conversation
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