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Equity versus debt financing with EMI

Short answer

Using EMI formula with principal Rs 10,00,000, monthly interest 1% over 36 months: EMI Rs 33,214 per month; total interest Rs 1,95,715.

Compare equity financing and debt financing. A startup takes a loan of Rs 10,00,000 at 12% per annum for 3 years, repayable in equal monthly instalments (EMI). Find the EMI and the total interest paid.

Equity vs debt

BasisEquity financingDebt financing
NatureInvestor buys ownershipMoney borrowed
RepaymentNone; investor shares profit and exitPrincipal and interest, fixed schedule
ControlFounders dilute ownershipFounders keep ownership
Risk to firmLow cash pressureDefault risk; may need collateral
CostExpensive in the long run (share of growth)Interest, usually tax-deductible
Suited forHigh-risk, high-growth startupsFirms with steady cash flows

EMI calculation

Principal P=10,00,000P = 10{,}00{,}000; monthly rate i=12%/12=0.01i = 12\%/12 = 0.01; n=36n = 36 months.

EMI=P i (1+i)n(1+i)n−1\text{EMI} = \frac{P\, i\, (1+i)^n}{(1+i)^n - 1} (1.01)36=1.43077(1.01)^{36} = 1.43077 EMI=10,00,000×0.01×1.430771.43077−1=Rs 33,214.31\text{EMI} = \frac{10{,}00{,}000 \times 0.01 \times 1.43077}{1.43077 - 1} = \text{Rs } 33{,}214.31

Total payment:

33,214.31×36=Rs 11,95,71533{,}214.31 \times 36 = \text{Rs } 11{,}95{,}715

Total interest:

11,95,715−10,00,000=Rs 1,95,71511{,}95{,}715 - 10{,}00{,}000 = \text{Rs } 1{,}95{,}715

The business must generate at least Rs 33,214 each month for debt service, apart from other expenses.

Answer: EMI = Rs 33,214 per month; total interest = Rs 1,95,715.

✓ Answer checked by Claude Opus 5.5 (high effort)

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