| The franchise's capital structure is the makeup of its
business finances - that is how much is debt ( borrowed money ) and
how much is equity ( owner's share ). Every franchisee needs to
understand the two primary forms of long-term financing available to a
franchise: debt financing and equity financing.
Equity financing is the selling of ownership of the company
to other investors. This includes dividing the business and its
managerial responsibilities among the different partners, owners, or
investors. The original owner does not have to repay these other
investors in cash, but instead gives them a share of the business
profits and managerial responsibilities. The investors receive money
from the business through the division of profits in the form of
dividends or capital gains. The primary sources of equity capital
include oneself, one's friends and relatives, and venture capital
companies.
Debt financing may be divided into two categories -
financing for working capital and financing for capital expenditures.
The advantage of debt financing is that it enables one to borrow money
and pay it back to the lender over time, on an appropriate, affordable
repayment schedule. The major source of debt financing include banks
and other financial institutions, friends, and relatives.
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