What is "equity financing"?

Equity financing refers to the process of raising capital by selling shares of a company to investors. This means that when a company opts for equity financing, it offers a portion of its ownership to outside investors in exchange for funds that can be used for various purposes like expansion, operational costs, or new projects. This method allows a company to generate funds without incurring debt, as no repayment is required like it would be with loans. Instead, investors gain a stake in the company and may share in its profits through dividends or increased share value.

The choice of equity financing is particularly beneficial for startups and growing businesses that may not have sufficient cash flow or credit history to secure loans easily. It also carries the advantage of bringing in investors who may add value beyond just funding, such as expertise, networking opportunities, and credibility to the company.

The other options revolve around various forms of financing but do not accurately represent equity financing. Borrowing money involves a debt obligation, while reinvesting profits references retained earnings used for growth without external funding. Loans specifically indicate a liability that must be repaid, distinguishing them from equity financing, which focuses on ownership and potential profit sharing instead of debt.