The Pros and Cons of Equity Based Financing

When operating a business, being able to raise money is a must.  You never know what trouble is going to be around the corner and you may need to borrow some money to make it through.  One way to raise funds is through equity based financing.  Equity based financing is when you raise capital for your business by selling stock in the company to investors.

There are good and bad to everything so let us first look at the pros of equity based financing.  The main major advantage is it is not your money.  If the business goes under, you are not on the line for repaying bank loans back thousands of dollars.  You can aim as high as you want and not need to worry about what happens if you miss.  This is a quick and easy way to raise capital for your company especially in a hurry.  Another advantage is you can focus on the task at hand and not need to worry about paying back bank loans.  This is nice because it frees you up to run the company.

While it is nice to not need to worry about paying the money back, equity based financing isn’t all pros.  One major con is if you are selling equity when the company first is starting, you can lose money in the long run because you must sell your shares so cheap.  This can be costly if your business ends up doing extremely well.  Another con of equity based financing is you lose a chunk of your company.  This means portions of money you make are now going to another person and they can also have a say in how the business is now ran. 

There are both pros and cons to equity based financing.  If you have any more questions, contact us at American Corporate Turnaround and let us know if we can be any assistance.