What is Equity Financing?
• Equity financing, also known as shared capital, is the strategy of gathering or generating funds for company projects through the act of selling a limited amount of stock to the public sector. Equity financing may involve issuing new share of common or preferred stock; the shares may also be sold to commercial or individual investors depending on the type of shares offered and the governmental regulations of the particular nation. Regardless of strategy or implementation, equity financing is primarily utilized by both large and small businesses for the purpose of raising money for new company projects.
Equity Financing vs. Debt Financing:
• Equity financing is a means of raising funds for some sort of business venture, such as the purchase of new equipment or the expansion of a company. If the underlying business entity does not raise money through equity financing it will embark on an alternative capital infusion, known as debt financing. Debt financing refers to the process of borrowing money from lenders and entering contracts to repay the lender according to the specific terms outlined in the loan agreement.
• A company will decide on how it will raise funds (debt financing versus equity financing) in accordance to the type of business venture it is pursuing as well as the company’s credit rating. The choice between equity financing and debt financing may also involve different outcomes for the project. The underlying company must consider the aftereffects of a failed venture as well as the fortunes obtained from a successful undertaking.
Purpose of Equity Financing:
• As a strategy to raise money, equity financing is typically undertaken with the expectation that the project funded through the sale of stock, will eventually turn a profit. At this point, along with realizing a net gain from the expectation or endeavor undertaken, the business will also be able to provide dividends to shareholders who purchased the stock.
• In addition to the aforementioned benefits of equity financing, the company will be free from outstanding debts owed to a lender—debt doesn’t exist as a result of raising capital through the issuance of stock.
• Because equity financing lends a portion of the company’s future growth to public investors the capital-raising strategy may not be beneficial to every company. Should the intended project be anticipated to yield a return in the short run, the underlying company may find the obtainment of loans at low interest rates to be more beneficial.