What are the key differences between debt financing and equity financing, and how do they affect a company's capital structure and risk profile?

Debt financing involves borrowing money that must be repaid with interest, while equity financing involves raising money by selling shares of the company. Debt does not dilute ownership but increases financial obligations, making the company riskier during downturns due to fixed repayment commitments. Equity financing, on the other hand, does not require repayment but reduces the original owners’ control over the business. A company with more debt in its capital structure has higher financial leverage, which can amplify both gains and losses. In contrast, equity financing provides more flexibility but may lead to pressure from shareholders for short-term results. The choice between the two affects the company’s cost of capital, risk exposure, and future financial decisions.