What does 'equity financing' involve?

Equity financing involves raising capital through the sale of company shares to investors. This process allows a business to gather funds without incurring debt, as it does not require repayment like loans do. When investors purchase shares, they gain an ownership stake in the company, which means they share in the company’s profits and losses. This approach can be particularly beneficial for startups or companies looking to expand, as it provides necessary funds for growth without the immediate financial burden of interest or repayment associated with debt financing.

In contrast, borrowing money with interest represents debt financing, which must be repaid regardless of the company’s performance. Investing in fixed assets pertains to purchasing long-term physical assets necessary for operations rather than raising capital. Using retained earnings for expansion denotes reinvesting profits back into the company instead of seeking external funds through equity or debt financing. Each of these alternative approaches serves different financial strategies and implications for a business.