Potential disadvantages of both debt and equity financing

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Reference no: EM132230808

A landscaping company operating in St. Albert, Alberta, is hoping to expand the business to provide services to North Edmonton. The company is currently profitable, and is expected to grow revenues by at least 10% (without the expansion). Expanding the company will significantly increase the potential market size, however the owner also realizes that it will take time and a lot of work to build new customer relationships.

Expanding the company will include adding 2 more crews, and the equipment (assets) needed for them to work (mowers, tools, vehicles, etc). The owner estimates that $50,000 will be needed to cover the expansion, and that these costs will be recovered in the first 12-18 months following the expansion. A friend has offered to ‘buy in’ to the business, and can prove the $50,000 in exchange for a 25% ownership share of the company.

Alternatively, the owner believes they may be able to finance the expansion through debt (a bank loan).

Describe the benefits and potential disadvantages of both debt and equity financing for this situation. What advice would you give them? Why?

Reference no: EM132230808

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