I understand the difference between the two. But I’m confused as to when would either be necessary especially in the context of pessimistic and optimistic sales forecast. Thank you in advance!
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Although sales forecasts are one aspect of the situation, for financing (debt or equity) the relevant question is what is the purpose of the additional funding.
If the funding is to increase the working capital to account for increased operations, broadly speaking, most companies would prefer debt. The increase in operations would presumably result in increased cash flow and profitability. This is a relatively easy sell to banks for loans. And there is a range of credit facilities – line of credits, short term loans etc.
If the funding is for long term investment, then the matter is more complicated. The choice of funding will be related to the riskiness of the investment, expected returns and time needed. If a company does this from a position of strength (ie history of profitability, sales increasing and need a new factory or capital for expansion), then debt is likely preferred if it can be obtained at a reasonable interest rate.
If the company is in a position of weakness (ie wants to embark on a very different line of business, recent loss of profitability, poor cash flow projections), it is more likely that banks will require fairly high interest rates or give poor terms. The company might have little choice but to pursue equity financing.
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