What is equity financing?
Every company needs a startup capital to build a business so they go in search of a good investor who is financially strong and they are given equity shares in return so that they can invest money for our company so this is called equity financing.
As everyone knows that today is the era of “give and take” so exactly, the investor invests the money and the company sells the shares to them. In simple words, equity financing is the way of raising capital from investors market through selling of company’s shares. The best part of this equity financing, we don’t need to repay capital and don’t pay any interest. Just like, if companies borrow investment capital from lenders such as banks or other financial institutions, they expect repayment of capital with interest. That’s why companies prefer equity financing more than debt financing, it may have another reason is debt is more risky than equity financing.
Motive of Equity Financing
Equity financing has only one motive to meet the needs of the company such as fulfill the business activities, such as resources, expenses, short-term requirements and long-term requirements to achieve goals for high potential growth of business. These investors can invest in the company anytime, to expand their financial growth. Every business owner should not bet on the investor, they should choose the investor according to the requirements of their company and the investor can be anyone.
Advantages of Equity Financing
- Raising funds: For new startup businesses, business owners have a fear of raising funds from such banks as a loan because it consists more of risk on debt financing so companies prefer equity financing for investment. Investors can be anyone such as angel investors, crowdfunding, venture capitalists. If these investors provide capital in the company so they also get a position of shareholder in the company.
- Involved in business operations: Equity financing also facilitates to company’s management by involving in business operations to contribute thoughts, ideas, suggestions for a company’s growth. These investors also wish to assist the company;s management about the production, marketing and sales department.
Types of investors
- Angel investors: These investors are generally your family, friends or relatives who are considered as individual investors, provide capital structure in expecting a high rate of return in investment and also provide some skills, financial experience to the company’s management for better growth.
- Venture capitalist: Venture capitalist is a team of investors in which they provide an amount of capital to the other companies growth in exchange of shares in the company. After investing, they have some rights such as decision making, share in profits, control on management. They receive a higher share as compared to angel investors.
- Corporate investors: Corporate investors are the companies who provide funds only to the private companies in the form of equity financing and get a partnership in the company.
- Initial public offerings (IPOs): Initial public offering offers a shares of corporation to the public in a new stock issuance and it allows a company to collect funds from public investors
- Crowdfunding: Crowdfunding is the platform where people can raise a small amount of funds for a business startup. It is a group of people who work in a team and provide online service through the internet. Everyone can be part of this funding. There are many crowdfunding sites where people can raise capital for any reasons such as business growth or startup, investment in social work, and raising funds for illnesses such as cancer, brain tumor. It is a worldwide process.