How Does Equity Financing Work?

Equity financing has become an increasingly popular financing method for businesses. As the name suggests, it involves exchanging equity for capital. When compared to debt financing, it’s a more flexible financing solution with a lower barrier of difficulty. Whether you run a small, medium or large business, you should consider equity financing. To learn more about equity financing and how it works, keep reading.

How Does Equity Financing Work?

The Basics of Equity Financing

Equity financing is a fundraising method used by businesses that involves selling ownership (equity) to an investor or investment firm. If you own equity in your company — and assuming your company is valuable — you might be able to sell some of your shares. The investor or investment firm will purchase your shares in hopes that your company will continue to grow, resulting in higher-priced shares that the investor or investment firm can resell for a profit.

Equity vs Debt Financing

Debt financing, on the other hand, is a traditional business financing method that involves borrowing money or credit from a lender. Debt financing doesn’t require you to sell or otherwise forfeit ownership of your company. Rather, you simply borrow money or credit from a lender under the terms that you’ll repay it, typically with interest.

Benefits of Equity Financing

With equity financing, you don’t have to worry about repaying the money given to you by the investor or investment firm. Whether you raise $10,000 or $1 million through equity financing, you won’t be required to pay back a dime. All the money is yours to keep and do as you please.

Additionally, you don’t need good credit — or any credit for that matter — to obtain equity financing. Equity investors don’t care about you or your business’s credit. Rather, they only care about the current value, as well as future value, of your business’s stock shares. If your business is poised to grow at a fast rate, equity investors will likely offer to purchase some or all of your business’s stock shares.

In Conclusion

Equity financing is just one of many ways to finance a business. When compared to debt financing and other traditional methods, it offers several unique advantages. Among other things, equity financing is fast, doesn’t require good credit, and you aren’t required to repay it.

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