Advantages of equity financing
What is Equity Financing
When a business gives out shares to people in order to generate capital from these investors it is known as Equity Financing. This in turn may generate various forms of relations. Likewise a share holder can have a share of the profit that is generated by the company or he might become a share holder of the business itself in varying degrees. This equity that is received by the investors in exchange of the funds that they provide for the business takes the form of stocks of the company. Equity finances are provided to private businesses mainly by venture capitalists or private equity firms and business angels. Equity Financing has quite a few benefits over other forms of financing like bank loans or loans from other agencies.
Advantages of Equity Financing
The funds that are provided for the business are committed towards the business and the projects that are related to it or are intended to be done. If the business does well only then the investors realize the investments that they have made.
Again, if choice of investors has been good enough then these investors bring resources for the business. They can help one to get skilled people, right contacts to build the business. They can also help one to get experienced people or they might help out with their own experience in the formation of the strategy or with decision making. After all these investors also have the same motive as the owner of the business and that is to keep the business going on well and generate maximum profits which leads to an increase in the value of the business.
It is often seen that if the business earns good revenue and the projects are a success then the investors become further interested in the future projects as well. This helps to get further investment for the business and maintains a smooth flow in the working of the business.
Equity Financing is a very good financing source for small businesses because it does not involve any obligation for the repayment of the finances in the initial phase of the business when the cash flow is quite slow. Whereas, in bank loans there are severe obligations and penalties in case a business fails to generate monthly interests and make the monthly payments to the bank.
One is more likely to get financing rather than debt financing. This is because of the fact that whereas equity finances concentrate on a good idea and the profits it can generate, bank finance has more interests in the security. So the banks usually see if the business has had a good track record so that it can give out a loan whereas the equity financers consider the credibility of the idea and the profits it is going to earn. Definitely this is a better prospect for people who are new into the field, who have new ideas that have the potential to generate a good profit but dont have finances enough to give shape to their ideas.
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