Equity finance means the owner owns funds and finance. Usually, their owners operate small-scale businesses such as partnerships and sole proprietorships through their own finance. Joint-stock companies operate based on equity shares, but their management differs from that of shareholders and investors.
Merits of Equity Finance:
The following are the merits of equity finance:
(i) Permanent: Equity finance is permanent. 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 on the stock exchange where the company is listed. However, this will not pose any liquidity problems for the company.
(ii) Solvency: Equity finance increases the business’s solvency and financial standing. In times of need, the share capital can be increased by inviting the general public to subscribe to new shares. This will enable the company to successfully face a financial crisis.
(iii) Credit Worthiness: High equity finance increases creditworthiness. A business with a high proportion of equity finance can easily take loans from banks. In contrast, those under serious debt burdens no longer remain attractive to 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.
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(iv) No Interest: In equity finance, no interest is paid to any outsider in the carcasses of the business’s net income, which can be used to expand the scale of operations.
(v) Motivation: In equity finance, all the profit remains with the owner, which motivates him to work harder. The sense of inspiration and care is greater in a business financed by the owner’s own money. This keeps the businessman conscious and active in seeking opportunities and earning profit.
(vi) No Danger of Insolvency: There is no borrowed capital, so no repayment has to be made on any strict schedule. This frees the entrepreneur from financial worries and eliminates the danger of insolvency.
(vii) Liquidation: In case of winding up or liquidation, no outsiders are charged for the business’s assets. All the assets remain with the owner.
(viii) Increasing Capital: Joint Stock companies can increase both their issued and authorized capital after fulfilling certain legal requirements. So, in times of need, finance can be raised by selling extra shares.
(ix) Macro Level Advantages: Equity finance produces many social and macro levels. First, it reduces the elements of interest in the economy, which relieves people’s worries and panic. Second, second-generation joint-stock companies allow many people to share in their profit without actively participating in their management. Thus, people can’t use their savings to earn long-term monetary rewards.
