Debt & Equity

Understanding Equity and Debt Funding

1) Tubeless Tyres do not deflate immediately on encountering a NAIL on the way

2) They allow the driver to drive for some more distance till he or she reaches a REPAIR SHOP OR A PIT STOP for getting the repair done

3) A normal tyre on the other hand would deflate on coming in contact with Mr NAIL immediately and stall the car there and then and bring tons of inconvenience to the occupants of the car

3) Now think of the normal tyre as a BANK that IS SUPPLYING CASH TO A BUSINESS JUST LIKE THE BANK SUPPLIES AIR

4) The problem with this arrangement is that the moment your business suffers due to a business problem or challenge like the tyre coming across Mr NAIL, the business can deflate immediately. This is because the bank will demand it’s interest the moment it is due which may leave the business without CASH WHICH IS JUST LIKE AIR in the case of the tyre. LIKE A TYRE CAN’T LIVE WITHOUT AIR LIKEWISE CASH IS AIR FOR A BUSINESS

5) No AIR in one TYRE is good enough to stall the CAR OR no CASH in a business can stall a BUSINESS

6) Now the TUBELESS TYRE is like a business funded by DEBT (BORROWING FROM BANK) AND EQUITY CAPITAL (BORROWING FROM INVESTORS)

7) In THIS CASE IF THERE IS A BUSINESS PROBLEM OR BUSINESS DOWNTURN just like TUBELESS tyres allowed you to drive to a repair shop, in the same way EQUITY FUNDING (although more expensive) allows the BUSINESS TIME to recover and come back INTO GOOD HEALTH

8) LIQUIDITY OR CASH FLOW is OXYGEN for any business just like AIR FOR THE TYRE

9)This is the reason a smart entrepreneur will take funding in both forms ; EQUITY AND DEBT

10) NEXT time you drive your car, check whether it is fitted with Tubeless Tyres