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What are the Advantages of Using Equity Capital for Investments?

written by: Bobby Ivie•edited by: Donna Cosmato•updated: 1/10/2011

A new or growing company that needs funding should look into the advantages of using equity capital. Equity capital can shave years off the time it takes to develop a business, and it can also launch a business that might not otherwise get off the ground.

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    rolling the dice on private equity capital investments 

    A company that is looking to expand may have a great idea or product, but not enough money to follow through with it. When cash is limited, the company has alternative funding sources to which they can turn, such as equity capital. The many advantages of using equity capital make it a very attractive option for companies that need to get funding for growth.

    Equity capital is money from owners of a company used to further the company's business. It is usually generated through the sale of stock, which allows the public investors to become shareholders, or part owners, in the company. Another way to generate equity capital is through equity investments from private investors. That money is known as private equity capital.

    Equity capital makes it easier for a new company to obtain funding for development. One without a proven record of accomplishment or assets to use as collateral may not be able to secure a business loan. However, there are always investors looking for good investment opportunities such as new company startups and good companies that are in the growth mode. If a business has good potential and a good business plan, these investors are happy to put up growth money.

    That is one of the most obvious advantages of using equity capital: A new or expanding company can grow using other people's money. That leaves the risk upon the investors because the company is under no obligation to pay the money back. It is not borrowed money.

    This makes it much easier for a business that has something valuable to offer to get up and running or to expand. Many business owners may have great ideas or inventions, but no way to develop them. By obtaining equity capital, owners can have the cash flow to make things available to consumers that may not have been available otherwise.

    Another one of the important advantages of using equity capital is that it helps a new or growing business to establish a network of potential investors. The business might be able to refer back to those investors in the future for additional funding. If the business is proving itself, and the investors have made money with it in the past, they will graciously provide the business with additional funding for development and marketing.

    Startup business owners and owners who want to grow their established businesses would do well to consider using equity capital. It provides the opportunity for company advancement without any of the obligations of a small business loan and interest payments. The entire amount of money generated can be used to further product development and marketing efforts. If a company has a lot of potential, equity capital can be a win-win situation for both the business and the investors.

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    Image: morgueFile

    Terminology and Defintions: Investopedia

    Overview of Equity Capital: