Financing

Equity Financing

Equity Investor bares some of the business risks and offers more than financing. It enables entrepreneurs to assume more risks and benefit from the expertise and support of the investor. We enable entrepreneurs and investors by offering them accurate, reliable and punctual solutions from the seller side or the buyer side

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Debt & Equity are common forms of financing. Under the umbrella of these classic forms come much more innovative forms that don’t necessarily fit the criteria of any, I.e. Convertible Notes, Preferred Equity, Profit-Sharing Agreements, Trade-Finance forms.

Financing meaning

Financing meaning is the process of providing funds for business activities, making purchases, or investing. Financial institutions, such as banks, are in the business of providing capital to businesses, consumers, and investors to help them achieve their goals. The use of financing is vital in any economic system, as it allows companies to purchase products out of their immediate reach. 

Types of financing

There are two main types of financing available for companies: debt financing and equity financing. Debt is a loan that must be paid back often with interest, but it is typically cheaper than raising capital because of tax deduction considerations. Equity does not need to be paid back, but it relinquishes ownership stakes to the shareholder. Both debt and equity have their advantages and disadvantages. Most companies use a combination of both to finance operations.

What is equity financing

Equity financing is the process of raising capital through the sale of shares. Companies raise money because they might have a short-term need to pay bills, or they might have a long-term goal and require funds to invest in their growth. By selling shares, a company is effectively selling ownership in their company in return for cash.

Equity financing comes from many sources: for example, an entrepreneur’s friends and family, investors, or an initial public offering (IPO). An IPO is a process that private companies undergo in order to offer shares of their business to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors. Industry giants, such as Google and Facebook, raised billions in capital through IPOs.

While the term equity financing refers to the financing of public companies listed on an exchange, the term also applies to private company financing.

Financing examples

Businesses typically have two options for financing to consider when they want to raise capital for business needs: equity financing and debt financing.

Debt financing involves borrowing money; equity financing involves selling a portion of equity in the company. While there are distinct advantages to both of these types of financing, most companies use a combination of equity and debt financing.

Equity financing is a method of raising funds to meet liquidity needs of an organization by selling a company’s stock in exchange for cash. The portion of the stake will depend on the promoter’s ownership in the company.

One of the most sought after methods of raising cash, apart from public issue, is via Venture Capital. Venture Capital (VC) financing is a method of raising money via high net worth individuals who are looking at diverse investment opportunities.

They provide the company with much needed capital to sustain business in exchange of shares or ownership in the company.

A start-up might need various rounds of equity financing to meet liquidity needs. They (VC) may like to go for convertible preference share as form of equity financing, and as the firm grows and reports profit consistently, it may consider going public.

If the company decides to go public, these investors (Venture Capitalists) can use the opportunity to sell their stake to institutional or retail investors at a premium. If the company needs more cash, it can go for right offer or follow on public offerings.

When a company goes for equity financing to meet its liquidity needs, for diversification or expansion purpose, it has to prepare a prospectus where financial details of the company are mentioned. The company has to also specify as to what it plans to do with the funds raised.

Equity financing is slightly different from debt financing, where funds are borrowed by the business to meet liquidity requirement. Ideally, to meet liquidity needs an organization can raise funds via both equity as well as debt financing.

The most common form of debt financing is a loan. Unlike equity financing which carries no repayment obligation, debt financing requires a company to pay back the money it receives, plus interest. However, an advantage of a loan (and debt financing, in general) is that it does not require a company to give up a portion of its ownership to shareholders.

With debt financing, the lender has no control over the business’s operations. Once you pay back the loan, your relationship with the financial institution ends. When companies elect to raise capital by selling equity shares to investors, they have to share their profits and consult with these investors any time they make decisions that impact the entire company.

Debt financing can also place restrictions on a company’s operations so that it might not have as much leverage to take advantage of opportunities outside of its core business. In general, companies want to have a relatively low debt-to-equity ratio; creditors will look more favorably on this and will allow them to access additional debt financing in the future if a pressing need arises. Finally, interest paid on loans is tax-deductible for a company and loan payments make forecasting for future expenses easy because the amount does not fluctuate.

Companies often require outside investment to maintain their operations and invest in future growth. Any smart business strategy will include a consideration of the balance of debt and equity financing that is the most cost-effective. Equity financing can come from many different sources. Regardless of the source, the greatest advantage of equity financing is that it carries no repayment obligation and it provides extra capital that a company can use to expand its operations.