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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 are operated by their owners through their own finance. Joint-stock companies operate based on equity shares, but their management is different from shareholders and investors.

Merits of Equity Finance:

Following are the merits 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 the general public to subscribe to new shares. This will enable the company to face a financial crisis successfully.

(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 under serious debt burdens, they no longer remain attractive for investors. A higher proportion of equity finance means that 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: 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 greater in a business financed by the owner’s own money. This keeps the businessman conscious and active to seek opportunities and earn profit.

(vi) No Danger of Insolvency: There is no borrowed capital, so no repayment has to be made in any strict lime schedule. This makes the entrepreneur free from financial worries, and there is no danger of insolvency.

(vii) Liquidation: In case of winding up or liquidation, there are no outsiders charged on the business’s assets. All the assets remain with the owner.

(viii) Increasing Capital: Joint Stock companies can increases both the 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 level advantages. First, it reduces the elements of interest in the economy. This makes people Tree of financial worries and panic. Secondly, the growth of joint-stock companies allows a great number of people to share in its profit without taking an active part in its management. Thus people can use their savings to earn monetary rewards over a long time.




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