What Is Equity Financing ?
Equity financing (also called equity funding) is a process of raising capital by selling equity instruments like ordinary shares, preference shares etc. Companies issue share to investors to raise money for business. It is effective tool that helps to meet short-term or long-term obligation of the firm.
Advantages Of Equity Financing
The main advantages of equity funding can be pointed out as follows:
1. Less Risky
Equity financing is less risky method of financing than debt because firms do not require to repay loan and interest on the raised capital.
2. No Additional Burden
Another benefit of equity financing is that it does not suffer the company with financial burden like monthly repayment of loan and interest.
3. Opportunity To Grow
As we know that firms do not have to repay loan, so firms can invest more money to expand business. Therefore, it provides the opportunity to grow.
4. Raising More Fund
Equity financing can raise more capital than borrowing. So, it is more favorable option than debt financing.
5. Attract Investors
It can increase credibility and image of the company if the raised fund is invested properly. It helps to attract more investors and partners in the future.
Disadvantages Of Equity Financing
The main disadvantages of equity financing can be highlighted as follows:
1. Sharing Profit
One of the major drawbacks of equity finance is that company founders cannot enjoy 100 % profit because it should be share with the shareholders.
2. Costly Method
Equity financing is costlier than borrowing because of higher risk and no tax shield.
3. Sharing Ownership And Control
Another disadvantage of equity financing is that company should share ownership with the shareholders. So, it limits the power and control of founders.
Also Read
Advantages and disadvantages of debt financing
4. Possibility Of Conflict
Because of shared ownership, control and power there exists a possibility of conflict between investors and owners of the company.
Pros And Cons Of Equity Financing In Short
Pros
- It is less riskier than debt financing
- It avoids the financial burden of the firm
- It provides expansion and growth opportunity
- It can raise more capital than borrowing
- It lowers the credit problems
Cons
- It splits the ownership and profit
- It is complex and costly method of raising capital
- It may create conflict between shareholders and owners
- It lacks tax shield
- It is time consuming process
