Two key facts about equity finance are that it doesn't require debt repayment and it can become costly to regain full company ownership if the business thrives.
Here's a more detailed look at these points:
-
No Debt or Loan Payments: One of the biggest advantages of equity financing is that you're not taking on debt. This means you don't have to make monthly loan payments, which can be a significant burden for a new or small business. Instead, you're giving up a portion of ownership in exchange for capital. This can be very attractive for businesses with limited cash flow or those hesitant to incur debt.
-
Potential High Cost of Regaining Ownership: While not having to repay debt is a plus, equity financing also means giving up a piece of your company. If your business does exceptionally well, buying back the investor's stake to regain full ownership can become very expensive. The initial investment may seem reasonable, but the value of the equity can significantly increase as the company grows, potentially costing you a substantial amount to buy them out. This dilution of ownership and potential future buyout costs are crucial considerations when choosing equity financing.
