What are some examples of equity financing?
1 Answer
Equity financing generally refers to raising capital in stock markets or private placement of similar investments.
Explanation:
Consider the total capital needed by a venture (a new firm, perhaps, or possibly a project for an existing firm). In most situations, lenders will not finance 100% of the venture, especially if it is risky or large.
Equity refers to the portion of the capital that is not borrowed. If I want to start a brewery, I need capital for all sorts of things (building, equipment, initial supplies and perhaps even initial cash for payroll, marketing, etc.). Let's suppose that I estimate a need of $100,000 to start my brewery. A bank might lend me some of that amount -- if I have a great business plan as well as "equity".
In other words, I might be able to borrow $50,000, but I will need to come up with the rest (another $50,000) through a combination of perhaps my own cash (not very much!) or cash contributed by others. Other people will not likely offer me cash unless I offer them a share of profits in return. If I contribute $25,000 of my own and convince you to contribute the other $25,000, then you will likely insist on half the profits, because you have contributed half the equity financing needed to start the venture.
Note that only the initial "purchase" of equity is considered equity financing. When you purchase existing shares of stock through a stock market, you are just exchanging your cash savings for the current owner's savings, in a different form. For example, if you purchase $25,000 worth of stock in Exxon tomorrow, you are not paying Exxon or impacting the amount of capital available to Exxon. You are just "cashing out" the shares owned by someone else and making them your property.
