EQUITY AND ALTERNATIVES

What is Equity and its Alternatives

What is Equity and its Alternatives

Introduction

This essay will discuss the equity financing. All the relevant areas of equity will be covered in this essay. This paper will be designed in such a way the reader of this paper may get full insight of the equity financing. This paper will also be helpful for those who are looking for proper knowledge about equity financing. The paper will discuss various types of equity financing, purposes of issuance of equity and the alternatives available to equity financing. This paper will be prepared in such a systematic way that the reader will get a thorough understanding of every aspect of equity and related material. A number of books, articles and journals, will be used to explore valuable knowledge about the equity financing.

Discussion

Equity provides an ownership representation in an enterprise. The enterprise issues ownership units to other entities and to individuals. These ownership units are generally known as shares. Enterprises can use equity for finance raising purposes. The for-profits businesses commonly use equity for financing purposes. The enterprises traditionally exchange control or ownership with investors. The investors are those people who purchase shares or ownership units (Brigham & Ehrhardt, 2010, pp. 288).

Equity financing does not require any collateral. Equity helps in value creation through the growth of the enterprise. The investors do not require periodic interest payments. They require returns in the form of dividends. An enterprise must consider a couple of things while issuing equity. The enterprise must draw a line between how much control or ownership it is willing to sacrifice. Other consideration must be to analyze the ability to deliver the expected returns of investors (Brigham & Houston, 2011, pp. 223).

Sources of Equity Finance

The equity financing has various sources. An enterprise can use all or few of them. Some resources are useful for small businesses while others are useful for large organizations. There are two main categories of equity financing. One is a private equity financing, and the other is public equity financing. This section will discuss in detail about both types of equity financing.

Private equity financing is further divided into five different categories. First is raising equity through three Fs (Friends, Family and Fools) or owners providing equity themselves. This financing is termed as informal sources. Employees and trade partners are also fall into this category. This equity is essentially required at the early stage of a business. The owner must need to put own money into the venture in order to have a strong bargaining position in front of financers. Personal investment can be generated through personal savings, sales of personal assets for cash and getting money through personal loans. There are also some associations in each country that help in the development of small enterprises. These associations also provide sufficient funding based on certain eligibility criteria (Gartner et al, 2010, pp. 3).

The advantage of owner's direct investment is that the owner has the full control and ...