Understanding Equity Financing

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Written By Toma Bonev






If you have recently started looking into stock trading recently, then you have probably heard the term equity financing quite a bit. However, if you are a budding entrepreneur looking to find additional methods for funding your business plan, then you really need to know more about equity financing, as well as what it can do for you.

What is It?

In simple terms, equity financing can be defined as one of the safest and most successful ways for funding a new business. It requires selling shares of the company, in return for the funds they need to establish, market or expand the said new business. With equity financing, you are seeking investors who are willing to invest in your company’s future.

Highlight Points

Now that we have a decent understanding of the concept, it is time to broaden that understanding by putting some spotlight on the important aspects of equity financing.

  • Both public and private company financing are categorized as equity financing.
  • Most new businesses that opt for equity financing, normally do so, several times in one financial year
  • Companies that are below the breakeven point are also the ones who opt for equity financing most frequently during a financial year
  • The primary goal of equity financing is to provide a small company, or a start-up with immediate cash

Not to be Confused with Debt Financing

Debt financing is quite simply, any business debt. Such a debt is incurred as soon as a business takes any kind of a loan with interest on it. Therefore, debt financing includes everything from regular, long-term business loans, to smaller, short-term business loans.

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This concept is not to be confused with equity financing, where a company is selling percentages of their ownership, and therefore, does not owe it to the buyer to pay back the acquired funds. Equity financing is not a debt, and therefore, it’s by far a much better option for getting funds.

Beware of the Local Jurisdictions

Local jurisdictions are well aware and always wary of new companies looking for investors. This is a result of the fact that even in 2020, there is no shortage of con artists and fraudsters that utilize Pyramid or Ponzi Schemes to cheat people out of their hard-earned money. Get to know what the local laws are, register your company under the necessary authorities and only then can you hope to raise funds, without the undue suspicion.

In addition to traditional methods of raising funds for a new business, you should also try raising money online. Crowdfunding is big these days, provided that you have a good idea and a business plan to show. This would be a particularly good idea if you have a more consumer-centric idea. For example, indie game developers often rely on crowdfunding to bring their visions to life, and share their ideas with gamers like themselves. It’s not just about video games though, because crowdsourcing has already provided the resources necessary for everything from wristwatches to gardening pencils!