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What Is Equity Financing

Equity financing is raising funds for company projects by selling stock to investors. It involves issuing shares of common or preferred stock to commercial or individual investors. Equity financing is an alternative to debt financing and is often ideal for funding new projects, though debt financing may be preferable if a project can yield quick returns and launch sooner.

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8 views2 pages

What Is Equity Financing

Equity financing is raising funds for company projects by selling stock to investors. It involves issuing shares of common or preferred stock to commercial or individual investors. Equity financing is an alternative to debt financing and is often ideal for funding new projects, though debt financing may be preferable if a project can yield quick returns and launch sooner.

Uploaded by

nausamuflihah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Question :

What is Equity Financing?

Answer :

Also known as share capital, equity financing is the strategy of generating funds for
company projects by selling a limited amount of stock to investors. The financing may
involve issuing shares of common stock or preferred stock. In addition, the shares may
be sold to commercial or individual investors, depending on the type of shares involved
and the governmental regulations that apply in the nation where the issuer is located.
Both large and small business owners make use of this strategy when undertaking new
company projects.

Equity financing is a means of raising the capital needed for some sort of company
activity, such as the purchase of new equipment or the expansion of company locations
or manufacturing facilities. The alternative mode of financing usually involves what is
known as debt financing. Debt financing is the process of borrowing money from
a lender, and entering into a contract to repay the debt according to specific terms
outlined within the loan contract. The choice of which means of financing to use will
often depend on the purpose that the business is pursuing, as well as the company’s
current credit rating.

With the strategy of equity financing, the expectation is that the project funded with the
sale of the stock will eventually begin to turn a profit. At that point, the business not
only is able to provide dividends to the shareholders who purchased the stock, but also
realize profits that help to increase the financial stability of the company overall. In
addition, there is no outstanding debt owed to a bank or other lending institution. The
end result is that the company successfully funds the project without going into debt,
and without the need to divert existing resources as a means of financing the project
during its infancy.

While equity financing is an option that is often ideal for funding new projects, there are
situations where looking into debt financing is in the best interests of the company.
Should the project be anticipated to yield a return in a very short period of time, the
company may find that obtaining loans at competitive interest rates is a better choice.
This is especially true if this option makes it possible to launch the project sooner rather

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than later, and take advantage of favorable market conditions that increase the
projected profits significantly. The choice between equity financing and debt financing
may also involve considering different outcomes for the project. By considering how the
company would be affected if the project fails, as well as considering the fortunes of the
company if the project is successful, it is often easier to determine which financing
alternative will serve the interests of the business over the long-term.

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