Equity capital is the capital required for a business that is raised from the owners. In other words it can also be said that equity capital is the money collected by a business by exchanging ownership share in the company.
The ownership in a company is represented by possessing the outright stock shares or by owning the right of converting the financial instruments into the stock of that particular private company. Venture capital firms and angel investors are the prime sources of equity capital for the emerging and new businesses.
The equity capital is also referred to as the money that is invested in the business by stockholders, owners or other investors who share the profits of the company. It can also be described as the sum of capital earned from the issuance of stocks and retained earnings.
Another concept of equity capital says that it is the cash instilled in the business in exchange for the business?s ownership interest and the ultimate losses or profits of the business. The various sources of equity capital to businesses are – Venture Capital Firms, Private Investment Sources or Public Offerings.
Typically, equity capital is described as the amount of capital that is provided by the owner of the company. With new equity capital, the firm gets new capital and hence the equity of the owners is increased by the equal amount that is needed. With the issuance of new shares in order to collect new capital, the equity of the shareholders is also increased.
The concept of equity financing involves selling equities and hence taking on investors in the business while being responsible to them. A lot of small business owners collect equity capital by bringing in friends, relatives, colleagues and customers in the process of investment. The concept of equity financing is just opposite to the concept of debt financing. The debt financing includes the business to get loans mainly from finance companies, banks, credit unions, private corporations and the credit card companies. By taking loan and financing the business, the owner can run the business according to his or her wish without being accountable or answerable to the investors. On this ground, the debt financing is more advantageous than the equity financing.
Last Updated on : 1st July 2013