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One of the ways of obtaining capital for a business is through equity financing. Equity financing is basically used to obtain share capital from outside sources by selling a certain amount of shares in a company to external investors.
There are a number of different forms of carrying out equity financing, for example sharing future profits with the investors to whom the shares have been sold, but the most usual form is sharing the ownership of the company to a certain extent.
There are a number of advantages of equity financing. First of all, any capital and fund which are raised from the external investors are used for the purposes of the business and the projects which are a part of the business.
This is because investors will not obtain a return on their investment if the business is not going so well, and there will be no future investments. Obtaining investment not only brings capital, but it also brings resources through the skills, experience, and contacts of the investors.
When the external investors make an investment in the business, they obtain ownership of a certain part f the business as well. Because of this, they are likely to be interested in the success of the business, as well as the increase in value, growth, and profitability.
Another advantage is that as the business grows and is successful, the investors will want to invest further in the business, and this will give a chance to obtain future funding.
There are a lot of advantages of obtaining funds for the business and raising capital for the business through equity financing, as compared to obtaining finance from other sources such as debt financing through obtaining bank loans.
But even with all those advantages, there are certain demands which are put on the business and these can prove to be disadvantageous. Following are some of the disadvantages of equity financing.
One of the major disadvantages of obtaining capital for the business through equity financing is the fact that it is a very demanding procedure. A lot of time has to be spent on it, and it costs a lot as well.
Due to the large amount of time which has to be spent on equity financing, there is a chance that the business might suffer because of the lack of attention to it. Another issue is that the external investors do not blindly invest in the company.
They completely investigate the company and its working, as well as any background information which is available. They also check the results of the past and future speculations of the business and its success
A big problem which may arise due to obtaining share capital through equity financing is that there are certain investors who have the ability to influence a number of major decisions being made by the company, and they are also able to influence the management of the company.
There are a number of regulatory as well as legal issues that have to be complied with in the case of equity financing.