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Business management and the board of directors determine a company’s capital structure, which usually consists of both debt and equity capital. Unlike lenders, equity investors receive an equity share in a business in exchange for a financial or other contribution to the company. In some cases, equity capital originates with angel investors, venture capital firms or venture capitalists. In other instances, a company obtains capital from a private equity firm, an institutional investor — pension funds and insurance companies – or a corporate investor.
Equity financing has no fixed payment requirements. As a result, the investments do not increase a company’s fixed costs or fixed payment burden. In addition, dividends to be paid to equity investors can be deferred and cash can be directed to business opportunities and operating requirements as needed.
Equity investors do not require a pledge of collateral. Existing business assets remain unencumbered and available to serve as security for loans. In addition, assets purchased with equity capital can be used to secure future long-term debt.
Equity investors are focused on future earnings and increasing the value of a business rather than the immediate return on their investment in the form of interest payments or dividends. As a result, businesses can rely on equity capital to finance projects for which the earnings or returns may not occur for some time, if at all.
A lender is concerned with the repayment of debt. The lender wants to ensure that loan proceeds increase company assets, which generate cash to repay loans. Therefore, lenders establish financial covenants that restrict how loan proceeds are usedAgra Investment. Equity investors establish no such covenants; they rely on governance rights to protect their interests.
Neither profits nor business growth nor dividends are guaranteed for equity investors. The returns to equity investors are more uncertain than returns earned by debt holders. As a result, equity investors anticipate a higher return on their investment than that received by lenders.Simla Wealth Management
Legal restrictions govern the use of equity financing and the structure of the financing transactionsAgra Wealth Management. In fact, equity investors have financial rights, including a claim to distributed dividends and proceeds from the sale of the company in which they investChennai Investment. The equity investors also have governance rights pertaining to the board of directors election and approval of major business decisionsNagpur Stock. These rights dilute the ownership and control of a company and increase the oversight of management decisions.
New Delhi Stock Exchange
