Equity finance is mostly adopted by small business enterprises to address the relative shortage of cash flow. Along with the advantages there are also certain disadvantages of equity finance. Debt financing employed by business organizations is an alternative of raising resources from the market.
More on the Disadvantages of Equity Finance
The principal disadvantage of equity finance is that the investors are turned into partial owners of the company.
Naturally they have a say in the business decisions of the company. Dilution of ownership interests often acts as a sort of infringement on the controlling and decision making powers of the managers. Yet another interesting point to be noted is that excessive dependence on equity financing means the concerned business venture has failed to use its available capital optimally.
The disadvantages of equity finance also lie in the fact that the procedure is demanding, wastes time and is costly. Day to day business operations often suffer as owners become engrossed in the technicalities of the equity financing project. Potential investors may seek classified business information.
In a nutshell, the business operations come under close scrutiny from potential investors. Certain regulatory compliances may be needed when a business firm opts for equity financing. This also drains out substantial time and energy on part of the company management.
Business ventures need capital or resources for their successful operation and maintenance. Equity financing and debt financing are the normal two options available for this purpose. Capital is important for business. However, no less important is the means for raising it. This is because capital raised through different means entails imposition of different conditions on the operation of the business. It is up to the management to decide, which course of action would be followed after conducting a well researched cost benefit analysis. It is a mixed bag. One needs to take ones pick depending on ones requirements.