An Overview of Equity Financing
An Overview of Equity Financing
Selling shares in a company is an example of raising money via the sale of equity. Investors are given a share of the company due to purchasing stock. Equity financing can include selling any kind of underlying assets, such as common stocks, preference shares, options, etc. First-time operating costs and the acquisition of plant assets need initial equity capital. For investors, dividends and price appreciation are two ways in which they might generate money.
Some of the most prominent investors in Equity Financing
A variety of equity financing sources for private enterprises include angel investors, crowdsourcing sites, venture capital, and investment firms. Shares may be offered to the general public in the form of an IPO in the future.
1. Angel investors
They invest in firms that they feel have the potential to create more enormous profits in the future, such as angel investors. In the long run, the organization benefits from the expertise, experience, and connections that the employees bring to the table.
2. Platforms for crowdfunding
Many members of the general public may contribute modest sums to a business via crowdsourcing websites. Shareholders invest their trust in companies because they believe in the company's ideas and anticipate a return on their investment in the long run. To reach a final objective amount, the majority's donations are tallied.
3. Venture capital firms
As a group of investors, venture capital firms invest in startups they anticipate will grow rapidly and ultimately become publicly traded. They put in more money and get a more significant stake in the company than angel investors. Financing via private equity is yet another term for this strategy.
4. Business investors
As a result, giant corporations engage in private businesses to supply them with the required capital. It's common for investors to make an investment to form a business alliance.
5. Offerings to the public (IPOs)
An initial public offering (IPO) may be used to obtain money for well-established companies (IPO). A company may raise money via an IPO by selling its stock to the general public for trading on the stock market.
Equity Financing has several advantages.
1. An alternative source of money
Instead of relying on bank loans, companies may turn to equity financing. If a firm has not had access to a large bank loan, business angels, venture capital firms, and online crowdfunding may be able to support it. Venture capital is less risky than debt funding since the company will not have to start repaying its owners. Investors often focus on the long term and do not expect a speedy return on their investment. As a result, rather than focusing on existing debt and interests, the company may instead use the money it takes to grow its business.
2. Access to business connections, management skills, and other ways to get money
Equity capital may also assist a company's management. The company's performance is essential to confident investors. Therefore they want to get your hands dirty and run it. Depending on their prior performance, they may be able to provide invaluable assistance in industry contacts, management expertise, and access to more funds. Investment firms and venture capital firms often provide this kind of help. When a firm is just getting started, it is really crucial.
Equity Financing has its drawbacks
1. Less control over ownership and operations
Using equity funding means you have to give up a piece of your company and relinquish some control over it. If the company succeeds and therefore is profitable in the future, payouts must be given to investors. Most venture capitalists need a 30 to 50 percent stake in a company that lacks a solid financial base to finance it. Businesses and entrepreneurs are often wary about giving up too much power when accepting equity investment.
2. Not enough tax breaks
Equity investments, unlike debt, do not provide a tax benefit to the investors. In contrast to dividends paid to shareholders, interest payments may be deducted from taxable income. It raises the price of equity financing because of the additional fees.
Equity financing is more costly than debt as a long-term investment strategy. As a result of this mismatch, investors want a better interest rate than lenders. It's not uncommon for investors to assume more risks to receive a better return.