Equity financing(1) is a great process that helps you acquire capital by selling shares within your company. This is a great way to finance your business when compared to bank loans. Of course, there are pros and cons related to every task, and here you can expect something very similar too.
With that in mind, here you have some of the main advantages of equity financing and some of the downsides you can encounter as well. This makes it easier to figure out what equity financing advantages are there and you can asses if this is good for you or not. It just makes the process simpler and more convenient.
Advantages of Equity Financing
-
Less risk
If you get money from investors, that means you have fewer risks involved in the entire process. Not only that, but you know that you don’t have to repay them right now. If you go with a bank, then this option is simply not available. So yes, having fewer risks are important, and you want to keep that in mind if possible, for the best results.
-
Credit problem
The credit problems are gone since you don’t have to go for credit. It’s a much simpler and certainly a lot more convenient approach that will give you the value and quality you want without rushing into anything. That’s definitely going to come in handy more than you might imagine.
-
Cash flow
Just like getting credit, one of the equity financing advantages is the fact that you get money right away. In this case, you can start investing and it will make the entire experience better and a lot more comprehensive. It’s a great opportunity and it will bring in front of some amazing benefits if you do this right.
-
Long-term planning
Once you are backed up by investors, it’s a lot easier to think about a long-term plan. You don’t really have that if you go to a bank, as the plan is to repay them. Here you can think about the future of your business. This is one of the main benefits of equity financing, and it certainly shows the true value provided by a service like this all the time.
-
Learn and gain from partners
When you accept investors, you also get to learn a lot of stuff from them too. The best part is that it brings in front of really good experience and the results themselves can be extremely impressive every time. After all, they want your business to succeed so they can get paid very well, so it’s beneficial for them to teach you new stuff, strategies, and many ideas. You just have to check it out and you will be heavily impressed with the results.
-
Retained Earnings
You can sell as many shares as you want, so you are in control over how much will remain in your hands. It’s definitely a very good option to consider and it will give you more value and support every time if you do it right. Once that is done, you will not have to worry about any issues that can arise, so take that into consideration.
-
Right Shares
In addition, one of the advantages of equity financing is the fact that you can split shares the way you want. No one forces you to sell shares a certain way, so it will certainly offer a lot more value and control than what you expect. It’s totally worth the effort, and you will find that the outcome is among some of the best every time.
-
Equity crowdfunding
You can use a crowdfunding service to obtain the funds you need. In fact, you can sell your shares to people that are willing to use such a service. It’s worth it and it will bring in a very interesting way to generate the funds you need. It’s a creative process for sure, so you do want to check it out for yourself and enjoy it as much as possible.
Also Read: What is Financial Risk Management – The Complete Guide
Disadvantages of Equity Financing
-
Share profit
Yes, a great disadvantage of equity financing is the fact that you need to share profits. That’s not going to be that simple, especially in the beginning. But if you want to acquire all the benefits of equity financing listed above, then you have to accept some of the downsides like this.
-
Loss of control
Once you have investors, you need to listen to them. That means they have as much say as you, depending on how many shares they own. Depending on how you sell your shares, you might end up without control over your own business.
-
Potential conflict
There can be conflicts if investors want a certain approach and you want another. If you get money from a bank and you have full ownership, this won’t happen. It can be a disadvantage of equity financing, so you really need to assess the situation and see what works for you.
-
Flotation Cost
When you open up your business for equity financing, that also means you have to expect flotation costs. These include legal fees, underwriting, and registration fees too. These do add up quite fast.
-
Costly way of raising fund
If you take these costs into consideration, equity financing is not that affordable. It will cost you to legalize everything, and there are a lot of fees to keep in mind.
Things to Consider when Equity Financing
- You need to assess your long-term goals and see if you actually want to own the business 100% or share the ownership with others.
- Also, seeing if the interest rates for borrowing money are high or not will help a lot. If the other option is to deal with high interest rates, then you don’t really have that much of a choice.
- Think about control too. Once you go for equity financing, it can be hard to have full ownership back.
Final Thoughts
Once you know the pros and cons of equity financing, it’s important to assess that and see what works for you and what can be improved. Adapting and adjusting to the requirements is a crucial aspect, and we recommend you to really take your time and see what approach is a good one in a situation like this. Just avoid rushing and study the advantages of equity financing as well as the downsides, then you will see what really works for you in the end.
