Equity finance is an essential source of financing in any business. It is raised through the sale of shares in a business. There are many other sources of business financing, but this is the most profitable one.
For example, if you opt for borrowing bank loans, they can prove to be demanding for a business in the long run.
In any business, among all the sources, equity financing is considered to be one of the best sources of funding. It is easy to get equity financing, but a business owner should be aware of all the pros and cons before opting for the funding source.
Every company has a different financial situation; hence, their financial needs also differ. Equity financing may work for some organizations while it may not work for other businesses.
Before borrowing from any source of finance, you should know about it and how is it going to affect your organization in the long run.
For example, In Ireland, if a business may be in dire need of financing. There may be an option of financing such as equity financing, debt financing etc. If the business decides to take out bad credit loans in Ireland , it may be difficult for the business to pay back in the long run. In contrast, equity financing is the comparatively safer option to und the business.
If you borrow from any source of financing, eventually, you have to pay back. But in the case of equity financing, you do not have to pay it back.
For example, in the case of loan borrowing, you have to pay back the principal amount plus the interest rate incurred on the principal amount.
If the business is in its initial stages, it is saved from extra financial burden and can manage its functions effectively. The business needs not to pay any instalment amounts and can focus on generating revenue.
This is an essential factor of consideration if the business does not generate revenue. Its survival becomes difficult.
For any organization’s financial requirement, equity financing is the sole option to stay carefree. No business can survive looking at its finances all the time.
It has to focus on its revenue generation. It also has to focus on the products and services delivered to its customers and how to improve upon its quality.
The main aim of the business should be to deliver high quality to its customers. Using equity finance keeps the business away from financial institutions and moneylenders.
If you apply for a loan for the financial needs for your business, you need a good credit rating. If you are not having a good credit score, there are high chances; you may not get any credit from the lender or financial institutions.
In this case, the best option is to use equity financing and save your business from any external debts.
If you opt for equity financing, you will likely be getting more skilled and experienced people for your business partnership.
With more skilled and experienced people, there are high chances that your business will earn more profits and benefits.
In the case of equity financing, all the money control is with the equity stakeholders. The money control also includes matters relating to business strategies and planning.
For applying for a loan, a bank needs 20 to 25% contribution by equity to finance.
If a business needs urgent funding, it can often apply for online loans and get instant funding, whereas equity funding may take time. In Ireland, many businesses opt for debt financing in case of an emergency.
If you are earning any amount of profit because of the equity financing, your investors expect a profit share out of it. In a way, it can be profiting for the business as the business is earning profits from the money it brought into the business.
In the case of equity financing, you will have to share the control with your business with the equity financers. Nothing is for, and in this case, the cost is your partial business control.
This is considered to be one of the significant disadvantages of funding your business through equity financing.
When you compare equity financing and other financing options, you will realize that equity financing is a costly option.
In this, the investors demand a higher rate of return as there is a high risk involved in this kind of investment made in the business.
In case if you are looking for fundraising, equity financing is the most troublesome option. It includes various costs such as underwriting fees guaranteeing charge, merchant financier fees, and statutory compliance.
An underwriter is required in a business for expecting the membership risks. When a business applies for IPO, it requires underwriters.
Financiers charge an administration fee for the subscription consent. This charge may be in the form of a discounted equity share.
With the points mentioned earlier, the advantages and disadvantages of equity financing are clearly defined. Before going for an equity financing option, you should weigh both sides and then make an informed decision as a business owner.
Decide between equity financing and debt financing and choosing the right option for your business.