Question

A colleague is thinking about pursuing equity financing for their business to raise capital and has asked you as the consultant for advice. He wants to know what an entrepreneur needs to know before pursuing debt financing options. Analyze the advantages and disadvantages of equity financing. The colleague also wants to know if the business is successful, what does it mean for the investor and the entrepreneur.
The summary would apply and include these points: (1) Explain how equity financing works; (2) What are the advantages of equity financing?; (3) What are the disadvantages of equity financing?; (4) If a business is successful, what does it mean for the investor and the entrepreneur?

Answer 1

Equity financing refers to the financing the business by own funds or by offering shares to public. Under equity financing portion of company ownership is sold to the investors to collect funds or own funds are invested into business. under equity financing investors receive ownership interest in the company

Advantage of equity financing - (1) control of management (2) decision making power (3) unlimited potential of capital gains and profit (4) no fixed financial commitment in the form of interest payment (5) free from credit formalities in case of debt financing.

Disadvantage of Equity financing - (1) High level of risk involve (2) Equity financing is also subject to capital loss (3) No tax advantage available which is available in case of debt financing (4) shortage of funds if further expansion is planned (5) conflict between equity investors

if a business is successful this would increase the value of investor funds many times and will increase the valuation of business. A successful business will increase the value of investor interest in the business and will increase the capital gain and motivate to invest more funds to earn heavy profit.