What is equity financing? EXPLAINED
By Article Posted by Staff Contributor
The estimated reading time for this post is 188 seconds
Traditionally, there are 2 ways to finance your business or startup. You can either finance your business through debt financing or equity financing. This article will be focusing on equity financing.
Equity financing involves selling ownership of a company to investors for cash to raise money for long term expansion or short term responsibilities like paying bills. In return, if everything goes well for the company, investors will have the opportunity to make high returns.
The main advantage that equity financing has over debt financing is that there is no need for any loan repayment. This makes equity financing the better financing option, especially when your business is still brand new as your business may not be generating much profit yet.
This would allow you to focus more on business growth. Plus, if your business fails, there is no need for you to pay back the initial investment.
However, there are also some cons to equity financing. Through equity financing, investors are entitled to some of the business profits and control over the company.
Sources of Equity Financing
Now that you have a basic understanding of what equity financing entails. Let’s take a look at some sources of equity financing.
IPO (Initial Public Offering)
Initial public offering or IPO basically means that a private company issues out shares open to the public. The shares would then be available in the publicly-traded market, like the New York Stock Exchange.
Thus the company will no longer be a private company but a publicly-traded company.
Advantages and disadvantages of going IPO:
Advantages:
- Generates a huge amount of capital
- Boost up the company’s share price
- Strengthen the company’s brand
Disadvantage:
- Companies must adhere to the SEC (Securities Exchange Commission) strict rules, which can be a hassle.
- More shareholders will emerge with voting rights reducing your control over the company.
Angel Investors
Angel investors are wealthy individuals or groups that are looking to invests in small startups or entrepreneurs. Angel investors look for investments that could potentially make them high returns.
The capital they provide can either be a one-time injection of cash or ongoing support to carry the company through difficult times.
Advantages and disadvantages of funding your business through the use of angel investors:
Advantages:
- Angel investors are experienced investors and well connected, which means that they can help you get resources and customers.
- Angel investors are comfortable with investing in new companies in comparison to venture capitalists.
Disadvantages:
- Hard to find
- High pressure as they are looking to make money and expecting a high return from your business
VC (Venture Capitalist)
A venture capitalist or VC is a professional investor that manages a venture fund. Venture funds are similar to mutual funds, except they invest in privately held startup companies rather than stocks.
Advantages and disadvantages of funding your business through the use of venture capitalist:
Advantages:
- The venture capitalist has the ability to provide more capital in comparison to angel investors.
- They become a real partner in business, connecting you with resources to help with your company’s operation.
Disadvantages:
- Venture capitalist only looks to invest in companies that are established.
- Extreme pressure as venture capitalist are highly focused on exit strategy and ROI
- The venture capitalist has terms that are very burdensome to you as a business owner as they want to protect themselves.
Conclusion
If you are a business owner who is looking to raise capital, equity financing is a good option especially, if you are not looking to raise capital through the banks and avoid the hassle of loan repayments.
The 3 main sources of equity financing are through IPO, angel investors, and venture capitalists. Each source of equity financing has its own pros and cons that you need to take into consideration.
RELATED ARTICLES
In Search of the Next Asset Bubble
The estimated reading time for this post is 308 seconds From Dot-com to U.S. Housing to Chinese Real Estate, there have been about nine notable global asset bubbles since the Great Depression. The most recent was the Special Purpose Acquisition...
Yes,Bitcoin Is a Financial Asset
The estimated reading time for this post is 239 seconds Yes, Bitcoin is a financial asset, but it’s not ready yet to be inside your 401(k), 403(b), and Traditional IRAs. If you know me, then you know that’s breaking news. ...
1 Comment
Leave Comment
Cancel reply
In Search of the Next Asset Bubble
Biggest Financial Crimes: Washington Mutual Financial Scandal
How Much is a Mortgage on a $700,000 House
Gig Economy
American Middle Class / Jul 20, 2024
In Search of the Next Asset Bubble
The estimated reading time for this post is 308 seconds From Dot-com to U.S. Housing to Chinese Real Estate, there have been about nine notable global...
By MacKenzy Pierre
Fraud & Financial Crimes / Jul 16, 2024
Biggest Financial Crimes: Washington Mutual Financial Scandal
The estimated reading time for this post is 249 seconds Biggest Financial Crimes: Washington Mutual Financial Scandal Washington Mutual, once the largest savings and loan association...
By Article Posted by Staff Contributor
American Middle Class / Jul 16, 2024
How Much is a Mortgage on a $700,000 House
The estimated reading time for this post is 193 seconds As of mid-2024, the housing market continues to navigate a complex landscape shaped by fluctuating interest...
By MacKenzy Pierre
American Middle Class / Jul 14, 2024
Financial Literacy: Building a Foundation for Financial Well-being
The estimated reading time for this post is 206 seconds Financial literacy is a critical skill that empowers individuals to make informed decisions about their financial...
By Article Posted by Staff Contributor
Stock News / Jan 02, 2024
Re-Drafting the 2023 IPO Class
The estimated reading time for this post is 147 seconds The Initial Public Offering (IPO) market is a significant barometer for economic health and investor sentiment. ...
By MacKenzy Pierre
Stock News / Dec 29, 2023
2024 IPO Draft Class
The estimated reading time for this post is 151 seconds 2024 IPO Draft Class: Ranking the Top Prospects Following the pattern of last year’s tumultuous market...
By MacKenzy Pierre
Stock News / Dec 22, 2023
Build Wealth with Boring Investments
The estimated reading time for this post is 314 seconds Due to their boredom, long-term, low-cost, and passive investing strategies have lost ground to more speculative...
By MacKenzy Pierre
Finance / Dec 10, 2023
Yes,Bitcoin Is a Financial Asset
The estimated reading time for this post is 239 seconds Yes, Bitcoin is a financial asset, but it’s not ready yet to be inside your 401(k),...
By MacKenzy Pierre
Business / Nov 24, 2023
Cash Management for Growing Businesses
The estimated reading time for this post is 147 seconds Cash Management for Growing Businesses: Navigating the Waters of Growth and Liquidity In the early stages,...
By MacKenzy Pierre
Fraud & Financial Crimes / Nov 21, 2023
Biggest Financial Crimes: Adelphia
The estimated reading time for this post is 255 seconds Biggest Financial Crimes: Adelphia Adelphia Communications Corporation, once a titan in the cable industry, became synonymous...
By Article Posted by Staff Contributor
Latest Reviews
American Middle Class / Jul 20, 2024
In Search of the Next Asset Bubble
The estimated reading time for this post is 308 seconds From Dot-com to U.S. Housing...
Fraud & Financial Crimes / Jul 16, 2024
Biggest Financial Crimes: Washington Mutual Financial Scandal
The estimated reading time for this post is 249 seconds Biggest Financial Crimes: Washington Mutual...
American Middle Class / Jul 16, 2024
How Much is a Mortgage on a $700,000 House
The estimated reading time for this post is 193 seconds As of mid-2024, the housing...
Pingback: What is Owner Finance? EXPLAINED - Finance - FMC