Equity Financing: A Tool for Business Growth - Essay Sample

Introduction

The growth of a company is attributed to the availability and accessibility of financial support. In this case, many organizations are forced to seek financial aid through Equity financing. This mode of financing can be attributed to the process of capital raising through the selling of shares. As a result, a company can raise money to settle its short-term bills. Through the sale of ownership in the company, they can accumulate cash for the business. On the other hand, the concept of debit financing seeks to generate a financial gain in an organization through borrowing from institutions or individuals. The debt is settled through repaying the principle and a certain amount of interest, as the profit. Through these two mechanisms, business operations benefit heavily based on equity and debt financing.

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Equity Financing

The raising of capital in an organization can be used to project extra cash for other projects. In this case, a company may wish to use a different approach in raising the capital. Equity financing refers to the concept of selling shares to external investors as a way of raising the required amount of capital. In other words, investors pay a certain amount of money, in exchange with ownership in the organization. This concept increases the total number of capitals invested in the company, as well as the number of owners. Unlike debt financing, equity does not require any promissory of paying back the amount to the investors. Moreover, the investors do not receive the principal and interest.

Despite the free transfer of ownership at a cost, there is a condition associated with equity capital. Investors expect a certain amount of acceptable returns that play the role of justification in the invested risk. However, if the company fails to honor these promises, the investor has an opportunity to share their interests, moving the capital elsewhere. In this case, this concept reduces the actual value of the company, which may humper the future performance of the company in raising money.

Investors under equity financing, have greater involvement with the organization's affairs, which may affect the performance of the firm. The number of shares sold to the public may affect the decision-making process in the organization, which may interfere with the essential projects in the company.

Debt Financing

On the other side of the coin, debt financing is a complete opposite of the equity financing, where a company acquires capital from a loan. This involves repaying of the debt, at a given period. Never the less, the money invested has to be repaid with a certain degree of interest. A company may decide to issue out a bond to raise capital.

Unlike equity financing, lenders face no claim to the firm's profit gains outside their original financial agreements. The lenders have one major upside, where a lender is capped from the onsets of the transactions, at the interest rates. However, the lenders face one major downfall which is mitigated through collateral requirements, and loan convents that should be repaid, in case the company suffers bankruptcy.

The Differences Between Equity Financing And Debt Financing

Among one of the similarities between the equity, and debt financing, is the ability to raise capital in a business, which helps them meet their plans. However, the distinctive nature of these two sides resides on their compensation plans. To begin with, equity financing is the money invested in the business from an outsider, who does not require repayment, with interest. This helps raise capital for the organization, which is compensated with a certain number of shares or ownership. On the other side of the coin, debit financing takes a different angle to generate capital for the organization. This is achieved through direct lending of the money to the firm with a promissory compensation of the funds. The lender benefits from the interest gained through the borrowed amount.

Equity financing refers to the transfer of ownership as a means of raising capital. This affects the overall decision making in the organization. More so, the decisions made have to be considerate to reduce the possibilities of diverting potential investors. On the other hand, debt financing does not involve the transfer of ownership in the organization, which does not have direct interference of the investors in the company. As a result, the organization decision-making does not have direct interference with investors interests.

Equity financing provides the organization with limited chances of financial risk involvements since there is no repaying the loan. Unlike debt financing, there is a higher risk associated with the investment, especially where the company is performing dismally.

The Benefits Of Equities and Debt

Both equities and debt play a significant role in the raising of capital to the firm, which gives a state of mutually beneficial to both parties. For instance, investors can enjoy the profits once the company reaches a better state of performance. The interest, in this case, is enjoyed in profit gained from the performance of the organization. On the same token, the firm enjoys a series of capital investment, that does not require repaying, rather than transferring of ownership. Firms can massively benefit from this form of investment to facilitate significant projects that pose higher returns in the company. On the other side, debit financing, provides a better and quicker way of settling the investment, unlike equity, which may be expensive.

Conclusion

In the bottom line, both equity and debit provide an avenue to financial support, which may affect the performance of the organization. A company can expand quickly through the use of these two means. However, debt financing may be expensive, where a company has limited means of income generation to help settle the debt. In other words, equities are better preferred due to their flexibility in ownership transfers.