What is Equity Financing, a study into investment and fund raising in Nigeria
What is Equity financing – A care into the future and well being to help attain the utmost functionality of a firm as well maintain optimal status in line with world industry best standard and practice, has invariably given rise to investment which in turn creates and sustains wealth.
If you’re a student, an investor, a firm and the likes, and probably want to understand the dynamics of equity financing and why companies go for it, the article you’re about to read will do just more than anticipated justice into your enquiry and puzzles.
Going by the majority, who will in one way or the other look a bit confused with this topic, I wish to inform you that:
Equity Financing: Is the act, practice or process whereby a company decides to raise funds and meet its financial obligations by selling its shares to the public. In other words:
Equity Financing is raising fresh capital to meet the liquidity needs of an organisation by exchanging it shares for cash, and who may provide this cash: Members of the public, institutional investors or financial institutions as the case may be. https://www.economictimes.com
Illustration: Bank ABC has a liquidity need of about N50 billion to fund a project, after a careful evaluation of possible sources of funding, the management and its financial advisers came to a conclusion that the best way forward is to sell in part its shares to the public who will be more than willing to buy.
Having done this, the funding was realised thereafter and the project was executed, this practice is known as equity financing.
However, equity financing can be executed in diverse ways and that as well, I’m committed to walk you through.
Types of Equity Financing
1 ) Angel Investors: An Angel investor is a high net worth and affluence individual who brings his/her money into a business, for the purpose of financing the business, especially through its startup stages.
An Angel investor could be a close relative of a person who owns the business or may not know the owner of the business, but come to know about it and invest through reliable financial network.
2 ) Venture Capitalists: This is a type of equity financing where professional investors on their own handpick businesses in which they wish to invest in. This type of investor is very selective and only after investing in businesses that are well certified and managed, as well have competitive advantage in their industry.
They play an active role in the business they invest in, alongside active participation to enable them watch the day to day activities of the business.
3 ) Crowd funding: This is an equity financing approach where a group of Angel investors come together, pull resources and invest in a particular business for the soul aim of profit taking at long run.
4 ) Initial Public Offering: This is the major benchmark of equity funding and financing as the case may be, full grown companies like banks, financial institutions and multinationals raise funds through this method called initial public offering buy selling their shares to the members of public as explained earlier, and it’s about the most popular and wide known equity financing in Nigeria.
The above types of equity financing could as well be referred to as sources of equity financing.
Advantages and Disadvantages/Pros and Cons of Equity financing
You may also like: How to get startup funding for small business
Raising money for a business via equity financing could have the following advantages
- You have a fund committed to your business and intended projects, in which investors only realise their investments if the business is doing well.
- You will not have to keep up with the cost of servicing bank loan
- You explore and execute growth ideas, being that investors are expecting value from the investment
- Venture capitalists and Angel investors can bring valuable skills, experience and contacts to your business.
- Investors are likely to provide follow up funding.
- Raising equity finance is demanding and could be costly and time consuming to your bottom line
- Established investors will seek comprehensive background information about your business which you may not be able to afford readily
- You will likely lose certain amount of power to the business, depending on the investor
- You are expected to invest routine management time to provide regular information for investors to monitor
- Your share of the business will reduce
- You will have regulatory and legal issues to comply with.
Equity vs Debt Financing
People often confuse equity financing with debt financing thinking they are the same, you are however about to understand the major differences that exist between these financing strategies and how they affect the firm’s bottom line.
Debt financing: Arises, when a company borrows money which will be paid back in a future specified date with interest accrued.
However, this loan could either be secured or unsecured, the essence of taking this loan is for the firm/company to finance its working capital.
From the above explanation you can now draw a wide margin between: Equity financing and what debt financing is.
In equity financing, the company raises funds by selling its shares while in debt financing the company raises funds by borrowing which may or may not require collateral to sustain.
Equity financing enables a calm and relaxed business model, being that whatever happens, you’re not on debt and does not worry on how to repay a loan which in most cases affects the business functionality of a firm being funded on debt financing.
Debt financing often comes with strict conditions or covenants regarding interest or principal payments, maintaining certain financial ratios and all that.
You now have a better understanding answering the question: What is equity financing and debt financing as the case may be, thank you for your time. You may drop your questions and enquiry via the comment box below.
Raphael Orji is a Digital Marketing Expert, Seasoned and Dynamic Freelancer, with interest in Banking, Personal finance, Entrepreneurial development. A Councillor and Motivational Speaker.
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