Alabama A&M University
S M A L L FA R M S R E S E A R C H C E N T E R
FA C T S H E E T
COLLEGE OF
AGRICULTURAL, LIFE
AND NATURAL SCIENCES
United States Department of Agriculture
Office of Advocacy and Outreach (OAO)
Financing Alternatives - Debt Vs Equity
If you are considering starting a new farming business, buying an existing one or expanding
your own farm operation you will need to do some detailed business planning. An integral part
of this plan should be your financial plan. Quite often the financial plan will require the owner
(s) to seek outside sources of capital to implement their plans. This factsheet will look at two
financing alternatives, equity financing and debt financing.
Equity Financing
Equity capital refers to money that you and any business
associate(s) inject directly into the operation. If your operation
is a sole proprietorship or a partnership, this type of financing
would likely be in the form of an owner's contribution and
would appear on the balance sheet as owner's equity. If your
business is incorporated, anyone contributing equity capital
would receive shares in the business. Equity capital results in
some degree of ownership to those making the contribution.
Debt Financing
The most common alternative to equity financing is debt
financing. This occurs when you make use of funds from a
lender. The loan would be used for capital spending or for
operating and would have to be repaid over a period of time.
There would normally be a clear repayment schedule and rate of
interest. Unlike equity financing no direct ownership rights
would be associated with the financing, however there are
usually some requirements to provide security by pledging (e.g.
mortgaging) assets. The lender receives interest payments in
exchange for risking his/her money.
Financing Strategies
Small Farms Research
Center
Alabama A&M University
4900 Meridian Street
James I. Dawson Building
RM #219
P.O. Box 700
Normal, AL 35762
How much debt and how much equity financing is appropriate and how will the mix affect
your business? Why not use someone else's money for all your capital requirements? These
are common questions to consider when assessing your financial plan. When a lender
considers lending you money they will analyze your operation's financial situation, especially
profitability, projected cash flows, and the health of your balance sheet. Things such as the
debt to equity ratio and the debt repayment capacity affect the decision a lender makes when
assessing a loan request. A prudent manager should also monitor the financial health of the
business regularly and strive to maintain an appropriate mix of debt and equity. The greater
the debt in relation to the equity (the debt/equity ratio) the greater the financial risk. The farm
manager should always strive to keep the debt/equity ratio within the recommended range.
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Equity financing allows the operation to consider further debt financing in the future, if needed. Increasing equity
improves your operation's security in most cases. Some common sources of equity financing include your personal
savings, or investments by relatives, friends, employees, or other business partners. Of course raising equity capital
may mean you have to accommodate new decision-makers in your business, depending on the specific arrangements. Are you prepared to share some of your profit and/or independence in exchange for this infusion of capital?
Will these investors have a say in how the farm is to be run or will they be passive partners? Will you see eye to eye
on management decisions? If you feel comfortable with these issues you should seriously consider some form of
equity financing the next time you need capital.
Author: Duncan M. Chembezi, Ph.D. Professor and Director, Small Farms Research Center , Alabama A&M University
Small Farms Research Center, Alabama A&M University
4900 Meridian Street
James I. Dawson Building, Room 219
Normal, AL
35762
Small Farms Research Center Background. The Small Farms Research
Center was developed to assist small farmers with limited resources in Alabama’s underserved communities. The center was first developed in 2000 to
assist minorities, especially women, African Americans and underserved individuals improve their farm management practices, given ones condition and
resources. The mission of the Center and the Small Farmers Outreach program
is to assist all small and limited resources farms effectively deal with risk management and food safety issues and provide them with informational sessions.
The Center has also expanded its outreach efforts to meet the needs of entrepreneurs and businessman. The center is located at Alabama A&M University
in the Dawson Building. The center specializes in following areas
Marketing and Business Plans
-Record keeping and Loan Application
-Identify alternative enterprises
-Personal Management
-Legal Issues
-Finances
-International Business and Procurement
-Accounting Issues
-Taxes
-Business Development
-Conducting seminars on Government programs and other issues
For more information about us give us a call at (256) 372-4970 and 1-866858-4970.
Website: www.aamu.edu/smallfarmers
Cooperating Units: USDA Office of Advocacy and Outreach (OAO), USDA/NIFA/ Beginning Farmers and Ranchers
Development Program (BFRDP), USDA/OAO/Outreach Assistance for Socially Disadvantaged Farmers and
Ranchers (OASDFR) Program, Alabama Cooperative Extension Systems, and Alabama A&M University.
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