Saturday, November 27, 2021

Merits and Demerits of Equity Finance

Equity finance means the owner owns funds and finance. Usually, small-scale businesses such as partnerships and sole proprietorships operate by their owners through their own finance. Joint-stock companies use based on equity shares, but their management is different from shareholders and investors.

Merits of Equity Finance:

Following are the prices of equity finance:

(i) Permanent in Nature: Equity finance is permanent in nature. There is no need to repay it unless liquidation occurs. Shares once sold remain in the market. If any shareholder wants to sell those shares, he can do so in the stock exchange where the company is listed. However, this will not pose any liquidity problem for the company.

(ii) Solvency: Equity finance increases the solvency of the business. It also helps in increasing the financial standing. In times of need, the share capital can be increased by inviting offers from the general public to subscribe for new shares. This will enable the company to successfully face a financial crisis.

(iii) Credit Worthiness: High equity finance increases creditworthiness. A business in which equity finance has a high proportion can easily take loans from banks. In contrast to those companies under severe debt burden, they no longer remain attractive for investors. A higher proportion of equity finance means less money will be needed to pay interest on loans and financial expenses, so much of the profit will be distributed among shareholders.

(iv) No Interest: No interest is paid to any outsider in the case of equity finance. This increases the business’s net income, which can be used to expand the scale of operations.

(v) Motivation: As in equity finance, all the profit remains with the owner, so it gives him the motivation to work more hard. The sense of inspiration and care is more significant in a business financed by the owner’s own money. This keeps the businessman conscious and active to seek opportunities and earn profit.

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