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Explain the pros and cons of having share capital as a source of finance. [10 Marks]

Ref: [http://www.businessknowledgesource.com/finance/the_pros_and_cons_of_equity_ financing_029201.html] BusinessKnowledgeSource.com] There are quite a few different ways to raise funds for your startup or existing small business. The traditional path is known as debt financing, which involves taking on a bank loan or private loan. A different approach to gain capitol is to seek equity financing by issuing stock in your business. This option allows you to sell shares of your company to investors, which then injects your business with cash and leaves the investor with the chance to make a high return. But it is important to understand that there are pros and cons to equity financing. Knowing all the ramifications of this type of financing can help you determine if equity financing is the right move for you and your company. Pros of Equity Financing The use of equity financing will allow you to cut out the bank as a business partner. In addition instead of spending cash on loan repayments, you can use the infusion from equity investors to grow your business. Furthermore, equity investors can also help reduce your personal risk in the business. Also it is important to realize that in the event your business fails, you would still be required to pay back any bank loans you take, or reorganize the debt payment under bankruptcy protection. A crucial difference is that equity investors, however, usually do not have the same rights as debtors and you would not be required to return their original investment in the event your business collapses. Equity investment should be viewed as a long-term solution and a means that help you to inject both cash and experience into your start-up.

Cons of Equity Financing You should keep in mind that if you are seeking cash for the short term, offering equity is not the right approach. Investors will want their capital to help the company make good investments and position itself for medium- and long-term growth. If your cash flow has not picked up as you expected, you may want to consider calling a bank instead. Furthermore, you should understand that you have to cede some control over your company's operations if you offer stock to investors. When consider using equity financing it is important to consider what your longterm strategy is for your business. Investors will be looking for a plan to get a return on their investment, and that plan could include merging with another company, selling the company to a larger firm, or conducting a public stock offering which would then allow investors to sell their stock on the open market. Business owners should understand that along with sharing control, you will also be sharing the profits. It is important to make sure to run the calculations on any potential equity agreement. You can find that you are paying a larger percentage of your profits to investors than you would toward a bank loan. There are numerous sources of equity financing. Some of these are:

Venture capitalists. Venture capital funds are professional investment organizations that invest in growing industries only to make a profit. VC firms know several of their investment choices may not pan out but are often willing to take that risk in return for an occasional windfall. You should keep in mind that securing a venture capital firm that specializes in your industry means you will be bringing in owners who can offer experienced opinions on running the company but may also seek to exert significant control.

Angel investors. These are individuals who will have a personal stake in seeing a business proposition succeed. Angel investors often tend to focus their investments on sectors in which they have a personal interest.

Initial public offerings. Depending on the stage of development of the company, it may be possible to raise funds by offering shares in the company to the public. You should keep in mind that this activity is highly regulated and expert advice should be sought prior to embarking on this route.

Ref. [http://finance.mapsofworld.com/equity/advantages.html] There are many advantages of equity finance. Equity financing refers to the process of obtaining resources for a company through the issuance of preferred stock or common stock. Normally, shares are issued when the stock price is high. Equity finance is also referred to as share capital and it has its pros and cons. More on the Advantages of Equity Finance Resources raised through equity finance can be either cash, property or services. As opposed to equity financing, debt financing is the other option available to companies for raising resources. Under equity financing shareholders get ownership rights in the company in lieu of the money paid. Mostly the advantages of equity finance are reaped by the small business enterprises. Small business enterprises are likely to face some difficulties in their initiation days regarding the flow of resources.

Constraints of resources like cash flows plague these small companies. However, they have to find a way out since funds are essential for running a successful business venture. Money raised through equity financing does not entail any repayment obligation at that point. It saves the repayment burden imposed by alternative arrangements like bank loans and debt financing. They impose penalties on business organizations, which default in the stipulated repayments. The advantages of equity finance lie in the fact that equity finance eases out the various fund supply issues of the small companies without any immediate repayment burden. Equity investors look forward to mainly growth opportunities. Hence in place of an established concept they are on the lookout for a new idea. They are eager to take chance with a new company. Another interesting angle to the list of advantages of equity finance comes from the investors side. The investors themselves often act as counselors for the owners of these small businesses. They also often extend their network of contacts to the owners of the small business enterprises.

Cons of Equity Financing Equity finance is mostly adopted by small business enterprises to address the relative shortage of cash flow. Along with the advantages there are also certain disadvantages of equity finance. Debt financing employed by business organizations is an alternative of raising resources from the market. More on the Disadvantages of Equity Finance The principal disadvantage of equity finance is that the investors are turned into partial owners of the company. Naturally they have a say in the business decisions of the company. Dilution of ownership interests often acts as a sort of infringement on the controlling and decision making powers of the managers. Yet another interesting point to be

noted is that excessive dependence on equity financing means the concerned business venture has failed to use its available capital optimally. The disadvantages of equity finance also lie in the fact that the procedure is demanding, wastes time and is costly. Day to day business operations often suffer as owners become engrossed in the technicalities of the equity financing project. Potential investors may seek classified business information. In a nutshell, the business operations come under close scrutiny from potential investors. Certain regulatory compliances may be needed when a business firm opts for equity financing. This also drains out substantial time and energy on part of the company management.

Conclusion Business ventures need capital or resources for their successful operation and maintenance. Equity financing and debt financing are the normal two options available for this purpose. Capital is important for business. However, no less important is the means for raising it. This is because capital raised through different means entails imposition of different conditions on the operation of the business. It is up to the management to decide, which course of action would be followed after conducting a well researched cost benefit analysis. It is a mixed bag. One needs to take ones pick depending on ones requirements.

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