What is Equity Finance?
Equity finance is a method for raising funds through the sale of the shares of the company. By selling shares, they sell ownership in their company. Once the money is raised through equity finance the company will not have any liability for repayment of money invested by the investor. This method can be used by public companies that are listed in the stock exchange. It can be raised through an IPO(Initial Public Offer), Funding by Investors, or even by your business friends or relatives.
Benefits in Equity Financing:
- There is no obligation for repayment to the company. So there is no such burden to create separate funds or investment for repayment of equity.
- You can take the benefits of experience, knowledge, and connections of the VC( Venture Capitalist) or Investor who invested in your company. They will help you to grow in many ways by also providing many types of support like technical expertise, giving valuable suggestions or insight into the business, etc.
- It is not like debt finance or finance through a bank where you have to pay certain interest on the money you borrowed. Also, there is no scheduled repayment in installments like we discussed in the first point.
- Payment of dividends is also not mandatory, in case you have to use the money for expansion or you want to put the funds in new investment by which you can help the company to grow as well as investors will also get benefited from such actions you can retain the earnings and do not have to pay the dividends immediately.
- If you do not have a good credit history then no banks or financial institutions will give you funding then equity financing is the thing that can help you in providing funding.
Source of Equity Financing:
There are several types of sources that you can opt for financing through equity which are as follows:
- Angel Investors:
They are affluent (rich) individuals who provide funding for startups in exchange for ownership equity or convertible debt. The fund provided by them may be a one-time investment to help the business grow or to support by funding the company through its early stages.
- IPO (Initial Public Offer):
In this, the company offers its shares to the retail investor or you can say the general public to subscribe to their shares. The shares are listed on the stock exchange from where they can subscribe. You have to follow the guidelines issued by SEBI (Securities Exchange Board of India) for entering into the stock market.
- Venture Capitalist:
Venture capital is finance that is provided by investors to start-ups, early-stage and small companies that have the potential to reshape markets and grow very fast. The money deployed by a Venture Capital firm usually comes from well-off investors, investment banks, institutional investors, corporations, or wealthy individuals looking to do some serious dough.
It is another source of funding in which the companies raise funds from large groups of investors (majorly angel investors) who contribute a small amount of money. This process is typically done via the internet.