Question

Provide the pros and cons for each of the nonequity and equity modes of entry.

Answer 1

Non equity modes of entry means raising finance through borrowing and equity modes of entry means raising finance through issue of shares to various investors . Equity mainly represents ownership in the company.

Pros of non equity mode of entry are -

1. No dilution of control , since the finance is raised from lenders on terms of regular payment of interest at fixed or variable rate depending upon the agreement.

2. When all the interest along with principal is paid , liability of company will be over.

3. Required to pay interest only as per the agreement , in other word no extra payment required to be paid in case of huge profit.

Cons of non equity mode of entry are -

1. Compulsory repayment of borrowed amount no matter how well company is doing .

2. Too much of borrowing or debt create negative impact on the profitability of the company as existence of of huge interest.

3. Regular payment of interest amount .

4. Company is required to pledge the assets as collateral security to the lenders.

Pros of equity modes of entry -

1. Easy way to raise huge amount of money .

2. Risk involved in equity is quite less than non equity mode of entry.

3. No burden of payment of fixed dues as in case of non equity mode of entry.

Cons of of equity mode of entry -

1. Dilution of controlling interest over company.

2. Legal and regulatory complications for issue of shares.

3. It is quite costly and time consuming and leads to management focus away  from core business activity .

Note. Pros and cons are considered from company point of view.