Equity financing and debt financing are two different ways of raising funds for the operation of a business. Equity financing involves raising funds for the business through the selling and sharing of the ownership stake in the company. In most cases common stock and preferred stock are sold to prospective shareholders in return for the investment that they make in the business.
The equity investors or the shareholders have the right to participate as the member of the company board and they have to be provided the return on their investments through dividends. Using debt financing companies finance for their business by taking out loans or borrowing funds from third parties. The lending parties are termed as the creditors of the companies and the company is liable to pay the principle as well as an interest to these creditors in order to repay the debt.