Definition of ‘Equity Financing’
Equity financing is a type of funding used by a business. Equity financing can be used at any stage (seed capital, venture capital, initial public offering) in the lifespan of the business, and involves the entrepreneur selling shares in the venture in return for receiving the money.
The advantage of equity finance is that unlike debt financing it does not normally require security, and investors share the risks and rewards of ownership of the business.
While money raised by equity financing does not incur an interest cost, equity financing can still be expensive. The cost of equity financing arises because part of the ownership of the business is sold in return for the funds, and a percentage of the profits now belongs to the investor shareholder.
The share of profits is paid out as a dividend to the shareholders, and as dividends are not treated as an expense, they do not normally reduce the tax liabilities of the business.
For further information see the Wikipedia equity finance definition.
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