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 the 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 medium that is Fixed income and Equity which is generally taken by businesses 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 whereas 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 and 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 bootstrapping stage the founders should pool in their own capital which is also in the form of equity in order 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 partners of the business and 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 Comparison between Equity vs Fixed Income
| Equity | Fixed income |
| Equity, when issued, 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 | Fixed income, when issued, does not involve any dilution of the shareholding of the owners of the business 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 has a high probability of failure | Fixed income is less risky when compared to Equity as the bank demands regular payments and recurring cash inflow occurs will makes the instrument less risky |
| In equity, there is no rate of interest which is related to the amount borrowed instead the company gives a controlling stake | In Fixed income, there is a fixed rate of interest on the amount borrowed by the company from the bank |
| Equity markets are commonly referred to stocks markets and private equity industry | 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 mix of both fixed income and equity to form a balanced capital structure enjoy leverage of 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 cost of capital.
Recommended Articles
This has a been a guide to the top difference between Equity vs Fixed Income Here we also discuss the key differences with infographics and comparison table. You may also have a look at the following articles to learn more –
