Which financing option typically has a lower cost compared to equity?

Debt financing typically has a lower cost compared to equity because it involves borrowing money that must be repaid with interest. The interest payments on debt are usually tax-deductible, which can further reduce the overall cost of borrowing. In contrast, equity financing involves raising funds by selling shares of the company, which can be more expensive due to the expectation of returns by equity investors, such as dividends or appreciation in the value of shares.

When a company chooses debt financing, it retains ownership and control, as there is no dilution of ownership among existing shareholders. Furthermore, debt is often viewed as a less risky option for investors than equity, especially when rates are low, adding to its cost-effectiveness for companies that are financially stable. This makes debt financing an attractive option for businesses looking to minimize their financing costs while still accessing capital for growth or operational needs.