Merits and Demerits of Equity Finance

Equity finance means the owner, own funds and finance. Usually small scale business such as partnerships and sole proprietorships are operated by their owner trough their own finance. Joint stock companies operate on the basis of equity shares, but their management is different from share holders and investors.

Merits of Equity Finance:

Following are the merits of equity finance:

(i) Permanent in Nature: Equity finance is permanent in nature. There is no need to repay it unless liquidation occur. Shares once sold remain in the market. If any share holder wants to sell those shares he can do so in the stock exchange where company is listed. However, this will not pose any liquidity problem for the company.

(ii) Solvency: Equity finance increases the solvency of the business. It also helps in increasing the financial standing. In times of need the share capital can be increased by inviting offers from the general public to subscribe for new shares. This will enable the company to successfully face the financial crisis.

(iii) Credit Worthiness: High equity finance increases credit worthiness. A business in which equity finance has high proportion can easily take loan from banks. In contrast to those companies which are under serious debt burden, no longer remain attractive for investors. Higher proportion of equity finance means that less money will be needed for payment of interest on loans and financial expenses, so much of the profit will be distributed among share holders.

(iv) No Interest: No interest is paid to any outsider in case of equity finance. This increases the net income of the business which can be used to expand the scale of operations.

(v) Motivation: As in equity finance all the profit remain with the owner, so it gives him motivation to work more hard. The sense of inspiration and care is greater in a business which is financed by owner’s own money. This keeps the businessman conscious and active to seek opportunities and earn profit.

(vi) No Danger of Insolvency: As there is no borrowed capital so no repayment have to be made in any strict lime schedule. This makes the entrepreneur free from financial worries and there is no danger of insolvency.

(vii) Liquidation: In case of winding up or liquidation there is no outsiders charge on the assets of the business. All the assets remain with the owner.

(viii) Increasing Capital: Joint Stock companies can increases both the issued and authorized capital after fulfilling certain legal requirements. So in times of need finance can be raised by selling extra shares.

(ix) Macro Level Advantages: Equity finance produces many social and macro level advantages. First it reduces the elements of interest in the economy. This makes people Tree of financial worries and panic. Secondly the growth of joint stock companies allows a great number of people to share in its profit without taking active part in its management. Thus people can use their savings to earn monetary rewards over a long time.

Demerits of Equity Finance:

Following are the demerits of equity finance:

(i) Decrease in Working Capital: If majority of funds of business are invested in fixed assets then business may feel shortage of working capital. This problem is common in small scale businesses. The owner has a fixed amount of capital to start with and major proportion of it is consumed by fixed assets. So less is left to meet current expenses of the business. In large scale business, financial mismanagement can also lead to similar problems.

(ii) Difficulties in Making Regular Payments: In case of equity finance the businessman may feel problems in making payments of regular and recurring nature. Sales revenues sometimes may fall due to seasonal factors. If sufficient funds are not available then there would be difficulties in meeting short term liabilities.

(iii) Higher Taxes: As no interest has to be paid to any outsider so taxable income of the business is greater. This results in higher incidence of taxes. Further there is double taxation in certain cases. In case of joint stock company the whole income is taxed prior to any appropriation. When dividends are paid then they are again taxed from the income of recipients.

(iv) Limited Expansion: Due to equity finance the businessman is not able to increase the scale of operations. Expansion of the business needs huge finance for establishing new plant and capturing more markets. Small scales businesses also do not have any professional guidance available to them to extend their market. There is a general tendency that owners try to keep their business in such a limit so that they can keep affective control over it. As business is financed by the owner himself so he is very much obsessed with chances of fraud and embezzlement. These factors hinder the expansion of business.

(v) Lack of Research and Development: In a business which is run solely on equity finance, there is lack of research and development. Research activities take a long time and huge finance is needed to reach a new product or design. These research activities are no doubt costly but eventually when their outcome is launched in market, huge revenues are gained. But problem arises that if owner uses his own capital to finance such long term research projects then he will be facing problem in meeting short term liabilities. This factor discourages investment in research projects in a business financed by equity.

(vi) Delay in Replacement: Businesses that run on equity finance, face problems at the time of modernization or replacement of the capital equipments when it wears out. The owner tries to use the current equipments as long as possible. Sometimes he may even ignore the deteriorating quality of the production and keeps on running old equipment.

How to Use Equity Financing for Setting Up A Home-Based Business for Retirees

In today’s economic condition, every business can experience fluctuations in their generated income and it takes a lot of expertise to keep your business afloat. For retirees who want to have their own business, looking for funds can be very daunting. So, if you are looking for some funds you can use for setting up your own business or expanding an already established venture, the sure way to get them is through equity financing. Equity financing allows you to generate funds without having to worry about monthly interests and repayments. Simply put, it can help your business produce funds without incurring an obligation to lending institutions.

However, this is not your typical free funds you get from the government. Although it is not considered as a loan, equity financing would mean that you have to part some shares on your company to independent individuals willing to set up the equity funds which you will use for your business. Basically, you will be giving part ownership to those involved in raising the equity funds. This will mean that they now have an equivalent common stock in your business and aside from this, they can also actively take part in the board’s activities and will have some influence on the way the business is being managed.

Equity financing can be sourced from your known associates, so your business control will stay within your circle. But if you are really looking for major equity financing, the best source is the entrepreneurial or venture capitalists who are looking for new business ventures they can put their money into.

Equity investors often look for businesses with large growth potentials which can give their money huge investment returns. Even if it is just a home-based business but shows great potential for growth, equity investors will always be interested in providing the needed capital. And if you are die-hard in getting a hefty amount in equity financing, make sure that your company has a great management team since equity investors are very particular on the company that they are planning to invest in and are being managed by people who really know the way of the business. If these qualities are integrated in your business, you will have a likely chance of getting equity financing from investors willing to risk their money for the sake of profit.

Although equity financing can offer a large monetary reward for retirees who want to setup their own business or expand an already established business in need of a fund to use for growth, always consider the factors that will affect the entire business in the future. If you see your business as a personal entity and you don’t want other people to meddle with your management, then consider other avenues in which to get your needed financing. Although equity financing relieves you of financial duties to lending companies, it will also take some part of your business away from you

Equity Financing – Sharing the Spoils

Is scarcity of funds obstructing your venture? Are you looking for ways to finance your new business but dread the thought of monthly loan installments? If you said yes to the above, equity financing is what your business needs. Equity financing helps you raise funds without having to shoulder the burden of repayment.

It ain’t money for nothing. Sure, equity financing is not a loan, but it isn’t a gift either! When you raise equity funds, you part with an ownership interest in your company. This ownership takes the form of common stock or preferred stock. If the company makes a profit, investors receive a part of it in the form of dividend. Apart from taking a stake in the company, investors may also participate on the company’s board of directors and take an active role in managing the business. Bet that’s stuck in your throat!

While informal sources such as family and friends can provide equity financing, the most important source of professional equity funding are venture capitalists. These are deep-pocketed financial wizards in the business of investing in new or riskier businesses in exchange for very large returns.

So, what do equity investors look for?

Growth potential: Equity investors are usually aiming for the stars, and their only concern is how soon there can get there. That is why companies on a high growth path, capable of delivering solid returns on investment are more likely to get financing.

Exit strategy: Venture capitalists in particular, look for companies that have a clear exit strategy. They don’t want to hang around till it’s time to walk into the sunset. Five to seven years is all they’ll give you, and in that time they’ll expect to have trebled their investment at a minimum. If they can’t find a way of pulling out by way of a strategic sale, they won’t play ball.

Management quality: Since equity financing is all about investors climbing aboard, you can bet they’ll want to know who is captain of the ship. They pay more attention to the capabilities of the management team than anything else.

While interest payments won’t loom large over your head with equity financing, it will make a different set of demands on your business. Weigh the pros and cons before you take a decision.

The best part is that you pay back your investors only if the business does well. That way, you’re not the only one bearing financial risk. The right venture capitalist can bring in valuable skills, experience, contacts and assist you with strategy and decision making. What’s more, if the business does well, you are likely to secure further equity financing from existing investors.

On the flip side, you will have to accept a dilution in your shareholding. Also, some investors can be very high maintenance – so be prepared to be answerable to a bunch of hawks! This is the hardest for independent minded entrepreneurs.

Once you have decided to go in for equity financing, get cracking on your business plan. Talk to your financial and legal advisers before you reach out to potential investors. Be clear in your mind on the following:

a) How much funding is needed and for what purpose?
b) For how long would you need these funds?
c) How much stake are you are willing to part with?

It’s best to answer these questions in your business plan and tailor the information according to the specific investors you plan to approach. Equity financing can be a boon for new entrepreneurs if it is used appropriately with targeted goals. Do refer to books like “Financing Your Small Business” and “How to Raise Early Stage Private Equity Financing” from and “Financing Your Small Business” from to find out how it can work for you.

Business Finance with Equity Finance

It has been said that nearly 61% of businesses are launched with either private capital or capital that is invested into their business by family and friends but investment doesn’t have to stop with merely just your family and friends, which is why equity finance exists.

Equity finance is cash that is invested into your business in return for a share of your business. These investments of cash never have to be repaid and don’t have interest attached to them. Equity finance is true risk capital as there is no guarantee that the investor will get their money back at all and these investments are not tied to assets that can be removed from your business should it fail.

The way in which investors get a profit from their investment is the fact they have a share in your business. This share means that investors either get money that is generated either through a sale of the shares once the company has grown or through dividends, a discretionary payout to shareholders if the business does well.

There are several types of equity finance such as business angels and venture capitalists. Each type of equity finance varies in the amount of money that is available for investment and the process of completing the deal.

If your business can support a growth rate of a least 20% you are more likely to be able to get equity finance. If you can’t generate a growth rate of at least 20% in your business then you are unlikely to be able to gain equity finance. It is the idea of control and the prospect of higher returns if your business is successful that attracts people to invest in your business

Sadly however many people are still highly reluctant to seek the help of equity finance as they see the idea of it as ‘relinquishing control’ of their business. Many small businesses are especially reluctant if their business is growing fast. As a business owner you should ask yourself the following questions below making any decisions about choosing to use equity finance:

o Are you prepared to give up a share of your business as well as some of its control?

o Are you and your management team confident in the business and the products and services that are on offer?

o Does your business have a unique selling point?

o Do you have drive to grow your business?

o What industry experience and knowledge does your management team have?

You should also consider the following when it comes to obtaining equity finance:

o How much funding do you need?

o How much control are you hoping to retain?

o How long do you need your funds for?

Each business should investigate the options that are open to them when it comes to finance. Equity finance is medium to long term finance and is the perfect type of finance that is open to small businesses, especially if you are an entrepreneurial business. Entrepreneurial businesses are what private equity investors are mainly interested in. This is because they have aspirations and a high potential for growth.

If you are interested in the use of equity finance it is important that you speak to a financial team who can put you in touch with people who will be able to put you in touch with the right investors.

Home Equity Financing

Do you have home repairs that you want to finish but just can’t because you lack the cash to do so? Are you thinking of some investment opportunities that you would like to get into, but can’t because of limited funds? Do you have medical bills that you need to pay off immediately? If you are in great need of money but don’t have the means yet to provide for this need, you can consider home equity financing.

But before you get into any of this stuff, you need to understand how the system works. How does financing with home equity work? First, you need to know what the meaning of home equity is. It is the market value of your property minus the total amount of money you owe that is associated with your home.

Applying for home equity financing means you can borrow money from your credit line which is in the form of the equity of your home. If you’re still confused as to how this works, think about your credit card. Your plastic has a credit limit and as in the case of this type of loan, your home’s market value minus all the deductions would be the limit on how much you could borrow from the lender.

But unlike the case of a credit card which is an unsecured loan, a home equity loan does have security procedures which involve your property being the prime collateral for your debts. So only do this if you have emergencies and do it sparingly. You run several risks if you don’t properly plan on how you can pay off your loans and not lose your home in the process in any case you fail to make payments.

Some cases of non-payment actually resulted to foreclosure which is what you should avoid. Many people have lost their homes because they borrowed money from their home’s equity without thinking of the consequences and the probability of not being able to pay their dues on time. That is why it is advisable that you carefully plan out before you take out a loan on your equity. And once you do, make sure that you keep up with your payments in a timely manner. Although you can actually make minimum payments on your loan, try to pay more than the minimum to cover for the interest rates.

Take into consideration that the state of your credit limit solely depends on the equity of your property so if the banks and lenders feel that the value of your home is decreasing, they may reduce your credit limit or even freeze your account. That is why it is very important that you do this only on extremely tight situations and make sure you arrange for a payment plan in which you have assigned a certain budget to pay off existing loans tied up to your property. That way, your home equity will not decrease in value and you still have your credit limit intact especially on emergency cases. Remember that home equity financing could help you but it is only a temporary solution to your money troubles.