Benefits of Equity Financing
The term Equity financing refers to a sort of financing method where the investment is obtained from private sources in exchange of the stake of ownership for a company. The private sources can come from various ways such as investment funds, rich individual investors or even from an institution that offers the said type of financing.
Qualifying for equity financing does not have any predefined set rules or guidelines. In fact, it entirely depends upon the investor as they first analyze the business and if they find potential future growth they will invest for the same. Equity financing is beneficial for small and mid-sized companies.
Following are some of main advantage of equity financing:
Equity funding is financed for a business or a specific project. Investors generally realize the investment when the business is seen moving in a positive direction.
Equity financing helps to avoid the extra costs that are needed when it comes to debt finance or bank loan.This type of financing allows using the capital just for the purpose of business.
Equity investors often help a business to grow by imparting new thoughts and ideas on possible expansion which can be considered as one key advantage.
Choosing right investors often helps to increase customer base, right skills which adds more experience in setting up the business. At times, a known financier can also help in defining business strategy for optimum growth.
As the funding relates to the growth of business, the investors are keen to see the progress and at times often offer more funding with the expansion of businesses.
Equity financing is more like a private financing with vested interest for which there involves lesser regulatory control and compliance with other bodies;
Considering the advantages as mentioned above, there are some drawbacks with equity financing which should be kept in mind when planning for the same. Since the investor keeps a close eye on the progress, it is natural that the business owner will lose some control over the entire situation as they at times become a part of the decision making process. Increasing equity finance can be a daunting task, and it is also time consuming which eventually loses focus from the main domain. Furthermore upon accepting this type of financing the management team should ensure updating the investor as a regular or periodic basis as per the agreement. The owner of the business at the initial stage gets a smaller share in the business from the point of monetary terms or percentage. However they are subject to increase as the business gets booming.
So if the idea is to opt for Equity financing it is better to know all the pros and cons behind the same before finalization. Moreover, one should be very much active and ensure steady progress down-the-line because if the business fails at any point of time, things will go awry with the investor which may end up with a lot of debt and even legal hassles. So the best approach for this type of financing is to look for a known individual who can finance for the business growth.