Advantages and Disadvantages of Equity Financing
Equity financing is the owner, own funds and financing. Typically, small businesses, such as partnerships and sole proprietorships, are managed by their owners through their own financial management. Equity financing:
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The following are the advantages of the shareholders' equity: ] Equity financing is permanent. No repayment is required unless liquidation occurs. Once the sale of the stock is still in the market. If any shareholder wants to sell those shares, he can do so on a company-listed stock exchange.
(ii) Solvency: Equity financing increases the solvency of an enterprise. It also helps to increase the financial position. Where necessary, the share capital may be increased by inviting the general public to subscribe for new shares. This will enable the company to successfully face the financial crisis.
(iii) Credit Legality: High capital financing enhances credit value. Equity financing a high proportion of the business is easy to borrow from the bank. Are no longer attractive to investors compared to companies that are in serious debt burdens.
(iv) No interest: In the case of an equity interest, the higher the equity financing ratio, the lower the amount of funds required to pay interest on the loan and the finance charges, the majority of the profits will be distributed to the shareholders In the case of financing, no interest is paid to any outsiders.
(v) Motivation: In the equity financing, all profits remain with the owner, so it gives him motivation to work harder. Inspiration and caring feel greater in the enterprises funded by the owner's own funds.
(vi) No bankruptcy risk: No lump-sum repayment plan may be made under any strict circumstance as there is no borrowing capital.
(vii) Liquidation: In the case of a winding-up or winding-up case, no outsiders charge fees for commercial property.
(viii) Increased capital: A shareholding company may increase issued and authorized capital upon performance of certain legal provisions.
(ix) Macro advantage: Equity financing has many social and macro-level advantages. First, it reduces the interest element in the economy. This leaves people with financial worries and panic. Second, the growth of joint-stock companies allows many people to share their profits without being actively involved in their management.
The following are the shortcomings of equity financing:
] If most of the business capital is invested in fixed assets, the business may be short of working capital. This problem is common in small businesses. Owners start with fixed capital, which consumes most of the capital. Therefore, the remainder is used to pay the current cost of the service. In large-scale operations, poor financial management may also lead to similar problems
(ii) Difficulties with periodic payments: In the case of equity financing, and repeatability. Sales may sometimes decline due to seasonal factors.
(iii) High tax rate: Because there is no interest to be paid to any outsider so taxable income, therefore, the business is greater. This leads to a higher tax incidence. In addition, in some cases there is double taxation. In the case of a joint-stock company, all income is taxed before any appropriation.
(iv) Limited Expansion: As a result of equity financing, traders can not increase the size of their operations. Business expansion requires huge sums of money to build new factories and capture more markets. Small-scale enterprises also do not have any professional guidance to expand their markets. There is a general tendency for owners to try to keep their business in such a restriction so that they can maintain emotional control over it. Because the business is financed by the owners themselves, he is very obsessed with the opportunities for fraud and corruption.
(v) Lack of research and development: In a purely equity-based business, there is a lack of research and development. Research activities take a long time and require huge amounts of money to implement new products or designs. These research activities are undoubtedly expensive, but in the end when their results in the market launch, get a huge income. But the problem is that if the owner uses his own capital to finance such a long-term research project, he will face the problem of short-term debt.  (vi) Replacement delay: Enterprises with equity financing are facing problems in the modernization or replacement of capital equipment wear and tear. The owner tries to use the current device as long as possible. Sometimes he can even ignore the deterioration of the quality of production, continue to run the old equipment