Difference between Equity vs Fixed Income
Any business which needs to survive and stay healthy in the long-term and in the interest of time needs to raise financing and funds to meet its financial goals and fulfill its long-term plans. Any company needs cash inflow in the form of equity or cash from revenue to pay off its short-term and long-term obligations. In this Equity vs Fixed Income article, we will try to understand the key differences between the two major fundraising mediums: fixed income and equity, which businesses generally take to run their day-to-day operations and manage long-term capital expenditures as well.
Head to Head Comparison between Equity vs Fixed Income (Infographics)
Below is the top 5 difference between Equity vs Fixed Income.
Key Differences between Equity vs Fixed Income
Let us discuss some of the major differences.
- The major and the most important difference between Equity vs Fixed Income is that under fixed income there is a necessary payment obligation to repay the interest and the principal on the fixed income availed by the company from any sources. In contrast, in the case of equity, there is no such obligation for repayment; also, the term is much longer than fixed-income financing.
- Another major difference between Equity vs Fixed Income is that in equity investment the investor who is willing to invest in the company runs on a lot of risk as the returns on the investment are not steady whereas, in fixed income the return on the investment is steady. The cash flow looks recurring and consistent.
- A company can raise equity for the business from various sources for example – venture capitalist funds or private equity funds which are focused on a certain sector, also if a company is in the bootstrapping stage the founders should pool in their own capital which is also in the form of equity to kickstart the operations of the business. On the contrary, the sources of long-term or short-term fixed income for the company are major Banks and Non-banking Financial Institutions also government banks form which fixed income can be availed.
Equity is generally referred to as the shareholder’s capital which is being invested by the business partners. In the proportion of their invested amount, the stake in the company is generally decided. On the other hand, Fixed income when offered does not involve any sale of a stake or anything by the owners of the business it is simply a liability that needs to be repaid on a timely basis by the business.
Equity vs Fixed Income Comparison Table
Let’s look at the top 5 Comparisons between Equity vs Fixed Income.
| Equity | Fixed income |
| When issued, Equity involves a sale of stake or shareholding by the business partners, and often the private equity partner becomes a member on the board of the firm. | When issued, fixed income does not involve any dilution of the business owners’ shareholding, and the lender does not become a member on the board of the company. |
There are the following kinds of equity providers: –
|
There are the following kinds of Fixed Income providers: –
|
| Equity is much risky when compared to Fixed income as the equity financier expects a high return and reward it has made. The risk of failure is high as the company in which the fund has invested a high probability of failure. | Fixed income is less risky than Equity as the bank demands regular payments, and recurring cash inflow will make the instrument less risky. |
| Inequity, there is no interest rate related to the amount borrowed; instead, the company gives a controlling stake. | There is a fixed rate of interest in the amount borrowed by the company from the bank in Fixed income. |
| Equity markets are commonly referred to as stocks markets and the private equity industries. | Fixed Income is commonly referred to as the debt securities market or the bond market. |
Conclusion
Also, equity comes with voting rights as compared with fixed income. Hence both are a major source of financing and cash flow for any business. The company should focus on finding an adequate fixed income and equity mix to form a balanced capital structure to enjoy the fixed income. Striking a balance between both is not always possible. But the business should make sure that they can take advantage of the leverage and at the same time, not paying too much in the cost of capital.
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