Equity funds are those that a company raises through different equity sources. There are usually two main sources of funds that most companies use: debt and equity. A business that relies on debt funds takes out loans or bonds in order to finance its current needs. While these can be good ways to raise capital, companies should also look into equity funds. Money raised in this way is based on higher value of a company or its assets, rather than increasing the amount the company owes. Some of the most common sources of equity funds are the sale of stocks and other securities, private equity placements, and in some cases equity loans or equity lines of credit.
In general, stocks are divided into two major categories: preferred stock and common stock. Preferred stock is held by a few investors, each of whom purchases their shares from a company at a particular price. These stocks are usually only offered to close associates of a company, such as partners, employees, clients, suppliers, or big-money investors. Common stocks are made available in an Initial Public Offering to a greater range of investors. This sort of an offering is usually more lucrative than a private offering. One of the drawbacks of offering stocks is that investors usually expect a certain level of return on their investments and failure to meet that level can bring great problems for the company’s management. The stockholders usually require a say in the company’s actions and operations.
Private equity placements are an alternative to offering stocks. Investors of this sort usually provide a company with several hundred thousand dollars in equity funds, and they can also bring a wide range of skills and resources to a company.
Equity loans are typically based on the equity in a piece of commercial property.