Q:

What are advantages and disadvantages of equity financing?

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Quick Answer

Benefits of equity financing include not having to worry about repaying expenses associated with starting a business and having a low debt-equity ratio, while disadvantages include sharing ownership with investors and perpetually sharing portions of all proceeds with them. Equity financing, like debt financing, exists primarily for the purpose of helping people financially when they start companies, say authors at Dun and Bradstreet.

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Full Answer

One of the primary benefits of equity financing is that it helps entrepreneurs secure the critical financing they need, and might not otherwise receive, to start a company. Upon starting a business, people engage the help of investors or financial experts. These investors supply business owners with the amount of money they need to carry out operations. Business owners do not need to repay investors. However, in exchange for not returning borrowed payments, investors assume partial ownership of the funded company, say authors at Dun and Bradstreet.

While granting partial ownership helps people grow their businesses without worrying about finances, it presents some disadvantages too. These drawbacks include having a perpetual commitment to routing a set portion of income funds to investors. Having a joint ownership also lets investors have some control over business decisions. As companies grow, investors receive more funds, which may ultimately cost business owners more than the initial equity financing fee.

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