Define equity financing.

Equity financing refers to the process of raising capital for a business by selling shares or ownership stakes in that business. When a company opts for equity financing, it is essentially offering ownership in that company to investors in exchange for their capital. This method allows businesses to access funds without incurring debt, as investors become part owners and share in the profits and potential losses of the enterprise.

The rationale behind choosing equity financing is often based on the desire to grow the business without creating burdensome debt through loans or other forms of debt financing. By attracting investors, a business not only secures necessary funds but also potentially draws in additional resources through the skills and networks of those investors. This can lead to further growth opportunities and enhances overall business value.

Understanding equity financing is vital for small businesses, particularly startups, as it provides an alternative funding route to help them scale or develop their operations without immediate pressure to repay a loan.