What Is Equity Financing: Examples and Explanations

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There comes the point in many businesses’ life cycles where the company needs to raise funds. Businesses will raise funds for many reasons – to expand operations and grow, pay bills due, research and development, etc. 

According to recent information, the number of businesses that help initial public offerings (IPO) increased by 109 percent in 2020 from the previous year. Initial public offerings are one way businesses can use equity financing to raise funds for operations. 

Keep reading this guide to learn more about business financing, including equity financing examples to give you a better understanding of what it is and how it works.

Equity Finance Meaning

When a business requires funding, one of the more popular methods of obtaining capital is through equity financing. Equity financing involves a business selling a portion of its company through the issuance of stock in the company or other financial instruments. 

This method is opposed to debt financing, where the company will take on additional debt in order to fund operations rather than giving up a portion of ownership over the company. However, there are certain advantages of equity financing that you should be aware of, including

  • Not being obligated to pay the money back
  • It can be considered less risky
  • It doesn’t affect cash flow

Although the business owner may lose partial ownership over the company, not having an obligation to repay the capital can be a big advantage for the business going forward.

Equity Financing Examples

There are several different ways that a company can go about obtaining equity financing for their business. Here are a few examples of how businesses can take advantage of the additional funding.

1. Initial Public Offering (IPO)

One of the more popular routes businesses will obtain equity finance is taking the company public with an initial public offering (IPO). Companies will typically hire an IPO consultant when they are ready to list their company on a public stock exchange and issue shares of the company. 

Businesses can also opt for a direct public offering (DPO), which offers similar benefits but generally incurs fewer costs than an IPO.

2. Angel Investing

Instead of issuing shares to the public, angel investing will involve acquiring capital from an individual with the ability to provide those funds. Angel investors are generally wealthy individuals that have business consulting services advice they can share with the company. 

Just as investors receive ownership in a business from purchasing shares in an IPO, angel investors also receive a portion of ownership.

3. Venture Capital

Venture capital is similar to angel investing in some ways but typically involves individuals who form an entity. The venture capitalists will then use the pooled money to invest in companies and provide capital to them. 

In return for the funding, venture capitalists will also receive a portion of the ownership. Venture capital has been a popular business financing solution as venture capital funding reached $64 billion in the first quarter of 2021, a new record.

Ready to Get Started With Equity Financing?

Equity financing is an excellent way for businesses to receive capital and allow the business to grow and become sustainable. There are several equity financing examples we encounter relatively often. When a company goes public, it’s considered a form of equity finance where the business sells shares or ownership of the company in return for capital. 

If you are considering equity financing for your business or need a business financial consultant, contact us today, and we can help you get started.