What is Equity Financing? Types, Pros and Cons

financialtreat – will explain What is Equity Financing? Types, Pros, and Cons that you will get in the following article. Let’s look at this article carefully!

Equity financing – In business development, there is financing or capital. The capital provided by the investor is used for a specific purpose. For example, to cover unexpected expenses or to do product development. One type of financing is equity financing.

Equity financing has its advantages and positive and negative sides. If you are wrong in making a decision, it can cause losses for the company, especially for the new company. So, what is equity financing? Let’s take a look at the following review.

What is Equity Financing?

Equity financing or also known as equity financing is investment through the sale of shares in the company. So that this financing activity has a close relationship with sales or interests in a business in order to obtain business funds.

This equity financing is one example of external financing caused because this financing involves other parties from outside the company. This financing is done because the company does not get profit even though it is included as a successful company. So inevitably, the money that comes in must be allocated or rotated properly and correctly so as not to lose.

Types of Equity Financing

Here Are the Types of Equity Financing You Need to Know:

Shareholders’ Equity

Shareholder equity is the value of all total assets that will later return to shareholders if the assets are liquidated and all of the company’s liabilities have been paid off. Equity from these shareholders can also be a determining factor of a company’s financial condition or become the value of the company itself.

Company Owner’s Equity

The equity of the owner of the company is almost similar to the equity of shareholders. The difference is that later the profits from the equity of this owner will take from all areas of business including those that are not on the stock exchange.

For example, if someone owns a company with 3 subsidiaries. Two of the three subsidiaries are listed on the stock exchange. Then the shareholders’ equity holders are only entitled to 2 companies. While the owner’s equity is entitled to the assets of the three companies.

Equity Financing

Equity financing occurs when a company succeeds or has promising prospects but has not brought meaningful profits at this time. When this happens, one of the steps to finding capital is to do equity financing.

Home Equity

Home equity or commonly also called the value of the house is a way of assessing a house after reducing the total value of the mortgage. This equity becomes important, especially for those who want to buy or sell a house.

Equity Financing Advantages

No Need to Pay Back The Money That Has Been Invested

The advantage of equity financing is that you do not need to pay back the money that has been invest. However, in exchange, the investor owns a stake or rights in the company.

Can Maximize the Use of Funds

You can also maximize the use of funds because your company has no obligation to make payments per month.

The Threat of Having No Income

This is because investors will later get the right to have a voice. If in time the investor invades and interruptions so that later you lose the company’s policies and controls.

Surrender ownership

Consciously or not, the large number of funds provided by investors can be regard as installments or buying the company. so that if the company does not immediately improve its condition, it is even more loss-making, the investor can acquire or buy your business.

Even if you profit, then the results you get must also be share with investors. Because investors already have the right to the company when it comes to profit, income must also be divide in accordance with the terms of the agreement.

Investors Can Be Troublesome

If you get investors who are fussy enough, it will be difficult to make decisions according to the situation and conditions. Especially if you have more than 2 investors with the same amount of financing.

What is an Angel Investor?

An Angel investor or angel investor is a wealthy individual who offers to fund to startups and usually wants rewards in the form of business shares. Most angel investors come from people closest to you such as family and friends.

Types of Angel Investors

Family and Friends

This type of angel investor type is still the main choice for people who want to build a startup company. Not everyone who builds a startup is successful immediately, if family or friends become investors, of course they will understand it. But still, you need agreements with family and close friends when it comes to business.

Rich person

You can get investments from rich people, the way you can attend certain events or have meetings.

What is a Venture Capitalist?

Venture capitalists are one type of investment whose financing is in the form of capital participation in a private company within a certain period of time. This form of venture capital is cash given to the company.

Benefits of Venture Capital

Here are the Benefits of Venture Capitalists for Companies:

Increasing the Potential of Business Activities

In providing an injection of funds to a company, investors do not only act as investors or funds. Usually, investors also act as partners where they can also help in developing ideas and innovations that can help businesses have bigger companies. With investors who play a role in helping to develop ideas, there is an increase in the potential of business activities.

Trust from the Bank

Companies that have just been pioneer will certainly find it difficult to gain the trust of the bank. This is because there is no effective and stable management and system. Banks tend to avoid risks for fear that the company cannot pay installments or go bankrupt. Therefore, having qualifi capital becomes the main thing of the company.

More Efficient Marketing

Limite funds are usually a trigger for startups not to have maximum marketing. The existence of venture capital is expect that the company’s credibility can increase and gain a better image so that it can have an impact on the marketing of products or services offer by the company.

What is Fundraising?

Fundraising is an effort or process of activities in order to raise or raise funds, whether in the form of ink, alms, zakat, or other sources of funds from individuals, groups, organizations, companies, and governments.

Methods to Fundraise

Here Are Some Methods That Can Be Done to Do Fundraising:

Holding an Event

The first method is to hold an event. This method is quite popularly use by non-profit organizations (non-profits) to raise funds. They invite various guests to come to the event with a predetermine purpose. When the funds are collect, they funds will be hand over to the institution to be use in accordance with its purpose.

Creating a Campaign Through Social Media

This method is also often use for fundraising. You can simply create a fundraiser through various social media. You tell me about the institution you are running and the campaign for its purpose. Make sure you are transparent with this fundraiser.

What is an Initial Public Offering?

An initial public offering is an event where for the first time a company offers its shares to the public (public) in the capital market.

In addition to the footing fees that must be borne, some people still consider that initial public offerings are still one of the easiest and cheapest ways for companies to meet the needs of funds as a consequence of the growing company and increasing the need for investment funds.

Basic Methods in Conducting An Initial Public Offering

Full Commitment

Full commitment or often call firm commitment underwriting is an underwriting agreement where the underwriter binds himself to offer securities to the community and buy the remaining unsold securities.

Best Efforts

In this commitment, the underwriter will try their best to sell the issuer’s securities. If there is an unsold affect the underwriter is not obliged to buy it and therefore they only pay for all the securities that have been sold and return the rest to the issuer.

Difference Between Debt and Equity Financing

Debt Financing

Debt financing is the acquisition of funds by way of debt or borrowing money to finance business activities. In debt financing, you as a debtor have an obligation to pay a number of installments consisting of the principal of the loan along with interest.

In general, a company can get a loan from a bank or other financing company. Lenders or lenders tend to pay attention to debt to equity ratios, so companies need to maintain those ratios relatively low with the aim of being able to access debt financing when the company needs it in the future.

Also Read Financial Advisor :

Equity Financing

Equity financing is financing obtain by selling a portion of your company’s holdings to investors to become additional capital to develop the business.

Do you know about equity financing?

Equity financing represents the value of ownership of a thing. It can be a business, inventory, or shares of a company. The large or nominal interest of the owner over the company’s property is what is calle equity or equity. Thus the article I can make about equity financing is hopefully useful, thank you.

4 thoughts on “What is Equity Financing? Types, Pros and Cons”

Leave a Comment