Wednesday, January 8, 2020

What is Equity Financing?


What Is Equity In Business

In a development effort, there is financing or capital. Capital provided by the investor is used for specific purposes. For example to cover unexpected expenses or to perform product development. One type of financing is equity financing.

Before that, you have to know what is meant by equity financing. Equity financing also known as a capital investment through the sale of shares in the company.

Equity Financing

So that this financing activity has a close connection with the sale or interest in a business to obtain operating funds. This equity financing is one example of external financing. This is due to financing involving other parties from outside the company.

This financing is done because the company did not make a profit even though included as a successful company. So inevitably, the incoming money should be allocated or played properly in order not to lose.

Other than that this financing is generally done when the price per share is high. So for even a small stake, by so doing, the proceeds could be used to develop the business.

However, equity financing is different from debt financing. This is because the companies that received capital under no obligation to pay interest and principal on the debt. Instead, investors will acquire part of the shares of the company. That compares with a large share of investments made.

So, every shareholder with voting rights. If the investor to inject substantial funds, it is not impossible also will have great control will the company, including policies to be set. If this happens, then the company can lose control of the business.

Basically, the purpose of doing equity financing is to raise funds for the company as for the startup. Thus, the capital of the financing is of major investors and the course of venture capital.

Investors inject capital in the company is referred to as an angel investor. That is, the investor is an investor either individual or group that has great wealth. So it is ready to provide financial support in large numbers. However, these types of investors do not get in on the management of a business.

Different from angel investors, equity financing can also be done by venture capital. Means investors are professional investors who generally have been formed into a venture capital firm. Investors are what will set aside a large enough order to finance companies that need financing.

However, to obtain such financing is not easy. This is because venture capitalists are very selective. The investors will provide funds to companies that are considered potential example can bring big profits in return. This is because the ultimate goal of the financiers of this type is transforming the company into the public via IPO (public bidding mechanism).

Equity financing has an edge or positive and negative sides. Wrong-wrong in taking the decision could lead to losses for the company especially for the new company. The following are the advantages and disadvantages.

The time difference is hanging by the investors themselves. Nothing could be years, but some are just set a time in a matter of months. However, the excess, Even if already getting results, investors will not require payment and interest.

Even if you are lucky, then your results should also be shared with investors. This is because the investors own the rights to these companies so that when the profit, revenue should be divided by the terms of the deal.

Importance Of Equity Financing

Equity holders enjoy voting rights and other privileges that come with ownership. since equities represent a claim on a proportional share of the assets and earnings of the company.

These claims are generally lower than the claims of the lender, but only shareholders who can actually participate in and benefit from growth in the value of the company.

Some financial instruments have characteristics of equity but are not really equity. Convertible debt instruments, for example, a loan convertible into shares when the company (borrower) passes a certain threshold, thus converting the lender becomes the owner in a particular event.

Stock options also acted as equity because the value is changed with the value of the underlying shares, but holders of options generally do not have voting rights and are not eligible to receive dividends or other distributions made to holders of equity bona fide.

It is important to understand that while stockholders' equity represents the net worth of the company, shares of the company in the end is only valuable if it is paid by the buyer of shares.

Equity Financing Advantages

The advantages of equity financing is that we have the option of using their own funds or investors when starting a business to finance the operations than we have to make a payment of bank loans or other financial institution or investor individu.

In equity financing will have a part of our business, how big a part depends on how much money they invest or to what extent they want to jump in business while we do not want to relinquish control over a business that is being developed.

Types Of Equity Finance

On an entity liability, there are five types of equities. Equity refers to the notion, as for the types of equity are as follows:

1. Account Equity Enhancer

Account equity adder can be divided into 2 types, ie retained earnings and paid in capital. Both accounts will later be described in the report of changes in equity and an equity enhancer element.

2. Paid-in Capital

Paid up capital is the amount of money deposited by shareholders. Paid-in capital can be grouped into two, namely:

  • Capital Stock, the nominal amount of shares outstanding.

  • Agio / Disagio Shares, namely the difference between the deposit of shareholders with a nominal amount of shares. Agio is the difference above par, while Disagio represents the difference is below par.

3. Revenue

Opinion (revenues) is profit entity that provides value addition to the company's registration period. In this case the income is retained earnings are used to expand an entity so as to increase the assets of the entity.

4. Reduction Account Equity

This is the opposite of your account equity adder. There are two accounts deduction from equity, which is taking a personal and cost. Both account this deduction will be declared as a deduction in equity with a nominal balance at the discharge report.

5. Personal Decision

This is a decision made by the owner of capital. If the company has liability, the personal decision (prive) can only be made if approved by the board of commissioners.

6. Load / Expenses

Load / Expenses are all expenses incurred by the entity for its operations in producing goods or services. On the equity statement listed cost and revenue not directly, but in the form of profit or loss.

Examples Equity in Accounting

For example, we can see some of the equity contained in a limited liability entity (Company). As some examples of equity is as follows:

  • Capital Company Limited consisting of shares.

  • Shares consisting of; Preferred Stock, Common Stock and Additional Paid in Capital Account.

  • The capital comes from donations (donated capital) can be reported as part of additional paid-in capital.

  • Premium (agio) or discount (disagio) from the sale of shares, either common stock or preferred stock.

  • Fixed assets revaluation, for the company doing the revaluation of fixed assets berdaarkan government regulations.

  • Retained earnings (retained earnings / residual income a year earlier) or Deficit / Accumulated Losses (residual loss the previous year).

Thus a brief explanation about the notion of equity, types, and examples of the equity in accounting. Hopefully this article useful and add your insights.