Equity financing is when a company sells shares of stock to an investor or group in exchange for funding, according to Entrepreneur. Relative to debt financing, another common funding source, equity financing has strengths and weaknesses.
A major benefit of equity financing is that the company doesn't have to repay the funds, according to the National Federation of Independent Business. Thus, the funds don't create a future financial burden or cash flow restriction. Company operators also look to equity financing as a way to spread the risks of business failure. If the business goes under, all owners of the company take a hit. Some investors bring expertise or a network of resources along with their financial contributions.
A key drawback of equity financing is that current owners relinquish some ownership and control in the company, according to the NFIB. Therefore, if the business becomes highly profitable, the wealth is shared among more people. Some investors insist on a seat on the company board or provide informal feedback on the decisions made by leadership. For business operators who have a strong vision for the company and want to retain control, taking on equity investment is a concern. In contrast, creditors typically don't seek control or input.