Raising equity from capital markets can be a great way for companies to access additional working capital and grow their business. Equity financing offers a number of advantages over debt financing, such as no repayment obligations and the potential for higher returns. Startups can access funding from angel investors, venture capitalists, or crowdfunding platforms, while more established companies can raise funds through an initial public offering (IPO). However, there are some risks associated with equity financing, such as the need to give up more property and decision-making power.
Companies must also comply with regulations designed to protect investors from unscrupulous operators. With equity financing, there are no loans to repay. The company doesn't have to make a monthly payment on the loan, which can be particularly important if the company doesn't make a profit initially. This, in turn, gives you the freedom to channel more money to your growing business. The most important advantage of equity financing is that there is no need to repay the money. However, the cost of capital is often higher than the cost of debt.
Of course, the owners of a company want it to succeed and offer equity investors a good return on their investment, but without having to pay or charge interest, as is the case with debt financing. Startups that may not qualify for large bank loans can obtain funding from angel investors, venture capitalists or crowdfunding platforms to cover their costs. Equity funding offered by angel investors and venture capitalists can provide access to outstanding business experience, vision and advice. A more consolidated company can raise funds through IPO, selling company shares to the public. Since there are no monthly payments associated with equity financing, the company has more capital available to invest in the company's growth. For example, angel investors and venture capital investors, who are the first investors in a startup, prefer convertible preferred shares over common stock in exchange for funding new companies, because the former have more significant upside potential and some downward protection. When a company remains private, equity funding can be obtained from angel investors, crowdfunding platforms, venture capital firms or corporate investors. Industry giants, such as Google and Meta (formerly Facebook), raised billions in capital through IPOs.
The IPO allows companies to raise funds by offering their shares to the public for trading on the capital markets. Chief among the benefits of equity financing is that it does not involve any repayment obligations and provides additional working capital that can be used to grow a company. Companies raise money because they may have a short-term need to pay their bills or need funding for a long-term project that promotes growth. However, you need to be aware of some risks associated with equity financing. For example, if a company decides to raise capital solely with equity funding, the owners would have to give up more property, which would reduce their share of future profits and their decision-making power. Finally, companies must comply with regulations designed to protect the investing public from unscrupulous operators who may raise funds from unsuspecting investors and disappear with the proceeds from the funding.
