What is equity financing
Equity financing is a type of business financing that involves the distribution of shares in a corporation or enterprise in other to raise funds or capital for the running and starting of new business in a corporation or organisation. What is Equity financing, it is basically refers to the sale of ownership interest of an organisation for the purpose of raising capital to run the business efficiently.
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Equity financing is different from debt financing in that s lender in debt financing does not have say or any profit in the business his money was used to run and also the borrower always has to return the money borrowed unlike equity financing in which the investors have say in the running of the business and also gets profits according to the rate of shares bought.
This rate is calculated in percentage while the reward for the investment is profit but should be noted that the reward for shares is dividends. The risk involve in this is that when the business fail, the investors lose their money in equity financing, the investors get their profit as the company values increases.
Sources of Equity financing
Sources of Equity financing does not only involve the selling of equity, it also involves the sale of quasi equity instruments like the sale of convertible stock preferred, preferred stock and other units of equity that include shares and warrants.
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For example, a Thompson investor can decide to buy the available shares put out by a company at a particular amount of money. Consequently, this gives him access to be one of the business associate in running the business with the aim of getting his profit when the company value increases. An investor also has right to buy any preferred stock available. For example, two company put out stocks of 20% worth $26,000 while the other put out 22% worth $26,000. The investors can decide to go for the one with higher stock for that particular amount.
A company can also decide to sell little shared because of the small worth of the company. Investors buy the shares and work on the company increasing in value, when the corporation start getting bigger and the value has increased greatly, to start selling the little shares in large amount of money. Investors would want to buy the shares because they believe the company will yield more and they would get their profit at a short period of time.
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Types of Equity financing
There are national securities authority that govern the operation and processes and types of equity financing by imposing rules on them. This is done in other to primarily protect the public that are investing from corrupt operators who may raise capital from non-suspected investors from disappearing with the finances proceeds at the end of the day. The pros and cons of equity financing are always accompanied by memorandum which contains the information that would help the investors make a decision about the advantage of the financing. Such information the memorandum of the company includes the officers of the company and the company activities and also the risk involve, use of the capital raised, financial statements and accounting and how everything is being run by their directors.
Investors need for equity financing depends majorly on the state of the finances management, finances market and financial equity market in general. The steady flow of sources of equity financing gives investor a confident as it is a sign of having and making profit if they invest in it. The steady flow of the equity financing continues to drop immediately the debt of the company start rising. This can be corrected if the debt collected is reduced and follow the steady pace of issuing funds for the financing of the corporation.
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Pros and cons of Equity financing
There are some measures should be taken when going into equity financing. Some of it are
- Get the business strategy and make sure the rate at which the business and the company will increase is very high
- Make sure the risk involve is very low.
- Make sure there is financial accounting which helps in providing the financial statement of the company and how the day to day transactions are.
- The debt of the company should be very low to avoid liability being more than the company assets.