How would you reply:

From my understanding debt financing is money borrowed, usually from a bank, to cover expenses that can not be paid by the business. Equity financing is money received from another business, organization, or person for a stake in the companies profits. Receiving money from a close relative for a certain percentage of the companies earnings is equity financing. Both have advantages and disadvantages. Receiving a loan from a bank means that the business is expected to pay it back by a certain date, plus the interest the loan accrues over the set period of time. Equity financing can be as simple as receiving $500 dollars from a friend or relative, for 15% of the companies earnings. The problem with debt financing is that you have to have a profitable business in order to be able to pay the loan back and still have money left over to pay for other expenses. It's a risk that must be calculated because the bank will ask for collateral if you are not able to pay it back, which is usually the land or domain of the business. If you finance properly and have a business with a healthy form of revenue or gross income, paying off the loans may not be a problem. However, fluctuations in business operations can heavily impact the companies profitability which could make paying back loans very difficult, especially if there is heavy interest. Equity financing can be also risky because if you only receive a small amount of cash from an outside source and are expected to give a certain percentage of your earnings back, there is a chance that you could lose a significant amount of income. This is especially true if you encounter unexpected growth in a business. It really depends on what your business is in order to make the right decision between debt or equity financing. If I was opening a small business in a local market area, I'd probably choose debt financing because I can receive a loan with low interest, already expecting net gains by a certain date. If I was opening a lawn care service I would choose equity financing, especially if I don't want my business to exceed a certain size. The money I gain from the exchange would exceed the money I have to pay back depending on what's asked in return, most likely a small stake in business revenue.