What is the difference between equity and debt financing?

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July 3, 2025

Company financing is one of the major concerns for operating any business. Debt financing and Equity Financing have been the two types of financing options that are most commonly sought after by companies in Hong Kong and around the world.

Equity Financing

Equity financing means someone is putting money into the business in return for ownership in the company. Apart from the ownership rights, equity investors also get parts of the future profit of the business.

How?

An advertisement and invitation to acquire shares of a company to the public are prohibited unless:

It complies with the prospectus requirements under the Companies (Winding Up and Miscellaneous Provisions) Ordinance; and
It has been authorised by the Securities and Futures Commission of Hong Kong (SFC) under the Securities and Futures Ordinance (SFO).

Instead of an offer to the public, a small and medium enterprise can raise funds by way of Private Placement which is subject to less regulations than an offer to the public. A Private Placement means an offer which:

made to no more than 50 persons
the total consideration does not exceed HK$5,000,000
the minimum principal amount to be subscribed for is not less than HK$500,000

A Private Placement must contain an appropriate warning in the form stipulated by the Company Ordinance. Besides, there should be no advertisement and press release regarding the offer and each offer document should be individually addressed to specific offeree and state clearly that it is not an offer to the public.

Advantages

No obligation to pay dividends on equity

Experienced investors can provide the company with valuable insights

No negative repercussions even if the company loses all the investor’s money

Reducing reliance on debt and improving financial health of the business

Disadvantages

Giving up a portion of ownership and control of the company

Attracting investors can be harder than getting a loan since equity investors risk more

Debt Financing

Debt financing means when a company borrows money and promises to repay the principal plus interest at a later date. Bank loan is the most common form of debt financing in Hong Kong.

How?

In Hong Kong, a loan can be given by an authorized money lender or a bank. A company if wishes to borrow money must enter into a Loan Agreement with the lender. A Loan Agreement operates as a contract between the borrower and the lender and will stipulate:

Whether this is a secured or unsecured loan
Principal amount
Interest rate
Any conditions to be fulfilled before the loan becomes available to the company
Dates for repayment
Obligation of borrowers and lenders
Governing law of the contract

For more information, check out our Commercial Loan Agreement template, please be reminded that in case of a secured loan, additional security documents are required.

Borrowing money from a financial institution which is not a bank is governed by the Money Lending Ordinance, whereas a bank loan is governed by the Code of Banking Practice. Both regulations set out how money lenders should conduct their business.

Advantages

No dilution of ownership of the company

Future profits will not be shared with lenders

Debt obligation (mainly interest payment and repayment of principal) are more predictable

Interest is tax deductible as expenses

There are flexible alternatives for collateral and repayment options

The company can build up credit score by making instalment payments over time.

Disadvantages

Debt must be repaid even when the business goes under

Some debt instruments restrict business from pursuing further or alternative financing options

Higher debt-equity ratios increase the financial risk of the company

Owners’ personal guarantee and securities for the debt are usually required by the bank

Comparison between Equity and Debt financing

	Debt Financing	Equity Financing
Meaning	Borrowing money directly	Obtaining funds through the sale of shares.
Ownership in the business	No giving up of ownership rights	Giving up of ownership rights
Nature of the financing	Recorded as "Liability"	Recorded as "Asset of the company"
Duration	Comparatively short	Long
Status of the financier	Lender	Owner (i.e. shareholder)
Risk	Low-risk	High-risk
Different types of financing	Term loan, debentures, bonds, etc.	Shares and stocks
Investment payoff	Interest and principal amount	Dividends
Nature of return	Fixed and regular interest	Variable, irregular dividends
Security	Security usually is required	No security is required

Key takeaways:

Debt finance means borrowing of debts, whereas equity finance is about raising funds by selling ownership in the company.

A SME is recommended to raise funds by private placement or entering into a loan agreement with an authorized money lender or a bank. Parties should be reminded to observe the relevant governing rules.

Debt and equity financing have their own strengths and weaknesses.

Debt and equity financing differ in a number of aspects including ownership in the business, nature of the financing, duration, status of the financier, risk, different types of financing, investment payoff, nature of return and security.

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