Advantages and disadvantages of private equity finance

Equity finance is the raising of share capital in return for a share of the business. This is mostly associated with sharing ownership of the business. Equity finance is provided by venture capitalists or private equity firms and business angels. This enables the share holder to have an element of control of the business for a medium to long term. The equity financiers do not have rights to the interests or have repayment dates. They are paid back as dividends and are directly dependent on the profits made by the business.

Since the risks associated with the business are shared by the equity finance providers; this capital; so acquired is also known as risk capital. Venture capital is usually used for big businesses that are floated in the stock market. Business angels invest in the early stages of development and growth in return for equity. Equity finance is risky and so the returns expected are higher as compared to other safer investment options. It is suitable for businesses that do not allow sanctions from the bank or the situation wherein the loan interest might be higher and payment would be difficult in the onset of development and progress of the new project.

Advantages

Investment is committed to the business and the project concerned alone. Investors realize their investments if the business does well. The correct business angles and venture capitalists add value to the existing project and take it to new heights with their expertise and experience. They can provide invaluable assistance in key decision making and strategies. They are resources for the business concerned. The investors are also interested in the business due to their investment since the progress made would reflect in the value of their equity. The investors are involved from their very beginning and hence would be interested to provide follow up finance for further expansion and growth.

Disadvantages

Raising equity finance consumes lot of time and is very demanding; not withstanding the expenses involved. This time could be well spent on the business at hand. Investors usually carry out back ground checks and this leads to immense wastage of precious time. Investors exercise control over management of the business in lieu of their investment in the business. They exert influence on decision making. Management time would have to be compromised since the investors require information to regulate or monitor the business and its progress. The share held by the owner is diluted. Though the owner might own a larger chunk of the shares. Legal and regulatory rules and regulations have to be satisfied while raising finance and the process is cumbersome.

Equity finance is appropriate especially when compared to other finance sources like bank loans. These are pros and cons of availing equity finance and they should be weighed against each other before making the final decision to avail it or look elsewhere for finance.