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North Country Alliance
Doing Business Guide.
Equity Financing
Equity funds come from selling a portion of the business to yourself or another person. The amount you have to sell to acquire the needed funds reflects the amount of risk that the investor perceives. With outside equity, you don't have to repay the funds, but you give up a share of ownership and will have to share decision-making and profits. If the business grows to the point where you wish to sell out, the real cost of an equity investor can be far greater than interest on a loan.
If a company has a high percentage of debt to equity (what it owes compared to what it owns), the company will find it difficult to get debt financing and will probably need to seek equity investment for additional funds. This means simply that the company's owner will trade a certain percentage of the company for a specified amount of money. As with debt capital, equity capital can come from friends and relatives or from the sale of stock.