Equity refers to the owner, equity and finance. Usually, small businesses such as partnerships and private property are run by their owners with their own capital. Joint stock companies operate on the basis of share capital, but their management differs from shareholders and investors.
Advantages of Equity Finance:
The following are the benefits of equity financing:
(i) Permanent in nature: Equity finance is of a lasting nature. There is no need to repay it unless wear and tear occurs. Shares that were once sold remain on the market. If any shareholder wishes to sell these shares, he may do so on the stock exchange where the company is listed. However, this will not create any liquidity problems for the company.
(ii) Solvency: Equity financing increases the solvency of the business. It also helps to improve the financial situation. Sometimes share capital needs to be increased by inviting public offers to subscribe to new shares. This allows the company to cope with the financial crisis.
(iii) Loan value: Strong equity financing increases creditworthiness. Companies with a high proportion of equity financing can easily borrow from banks. In contrast to the companies that are heavily indebted, they are no longer attractive to investors. A higher proportion of equity capital means that less money is needed to pay interest on loans and financial expenses, so that much of the profits will be distributed among shareholders.
(iv) No interest: No interest is paid to external parties in the case of equity financing. This increases the net income of the company which can be used to increase the scope of the business.
(v) Motivation: As with equity, all profits remain with the owner, giving him the incentive to work more. Inspiration and care are greater in companies that are financed by the owners’ equity. This keeps the businessman conscious and active in seeking opportunities and earning profits.
(vi) No risk of bankruptcy: As there is no borrowed capital, no strict cost estimate is required to repay. This makes the entrepreneur free of financial worries and there is no risk of bankruptcy.
(vii) Wear: In the event of winding-up proceedings or bankruptcy proceedings, there is no fee for outside parties on the assets of the company. All properties remain with the owner.
(viii) Increasing capital: Joint stock companies can increase both issued and recognized capital after complying with certain legal requirements. So in times when the need for capital can be increased by selling extra shares.
(ix) Benefits of macro level: Equity financing provides many social and macro benefits. First, it reduces the factors that are of interest to the economy. This makes people financially worried and panic. Second, the growth of joint stock companies allows a large number of people to share in its profits without actively participating in its management. Thus, one can use their savings to earn long-term monetary rewards.
The following are the conditions for capital financing:
(i) Decrease in working capital: If the majority of corporate funds are invested in fixed assets, companies may experience a shortage of working capital. This problem is common in small businesses. The owner has fixed capital to begin with and the majority of it is consumed by fixed assets. So less is left to meet the current expenses of the company. In large-scale transactions, financial management can also lead to similar problems.
(ii) Difficulty paying regularly: In the case of equity financing, a businessman may experience problems with regular and recurring payments. Sales revenue can sometimes fall due to seasonal factors. If there is insufficient funds available, there would be difficulties in meeting short-term debt.
(iii) Higher taxes: Since no outsider has to pay interest, the company’s taxable income is higher. This leads to a higher incidence of taxes. Furthermore, double taxation is in some cases. In the case of a limited liability company, all income is taxed before the appropriations are available. When a dividend is paid, it is again taxed on the recipient’s income.
(iv) Limited expansion: Due to equity financing, the businessman is unable to increase the scope of operations. The expansion of the business requires a lot of capital to build a new factory and capture more markets. Small-scale companies also do not have the professional advice available to extend their market. There is a general tendency for owners to try to keep their business within such limits so that they can maintain control over it. Because transactions are funded by the owner himself, so he is very obsessed with the chances of fraud and fraud. These factors prevent business expansion.
(v) Lack of research and development: Research and development is lacking in companies that operate solely on equity. Research activities take a long time and enormous resources are needed to achieve a new product or design. This research activity is undoubtedly costly, but in the end, when their results are launched in the market, high income is generated. But there is a problem that if the owner uses his own money to fund such long-term research projects, he will have trouble meeting short-term debt. This factor reduces investment in research projects in companies financed by equity.
(vi) Exchange Delay: Equity finance companies have trouble modernizing or replacing financial equipment when it does. The owner tries to use the existing equipment for as long as possible. At times, he may even look past the deteriorating quality of production and continue to run old equipment.