What is equity financing?

Prepare for the Ontario PHBI Financial Planning and Management Test. Study with flashcards and multiple choice questions, each with hints and explanations. Ensure your success with adequate preparation!

Equity financing refers to the process of raising capital by selling shares of stock in a company. When a company opts for equity financing, it invites investors to buy ownership stakes in the business, represented by shares. This method is distinct from debt financing, where a business would borrow money that must be repaid over time, typically with interest.

Raising capital through equity financing offers several advantages: it does not require repayment like a loan, which can ease cash flow concerns; it allows businesses to tap into the financial resources of a wider investor base; and it can bring in investors who may also contribute valuable expertise and connections. However, it also means that existing owners face dilution of their ownership and control, as new shareholders become part of the company.

The other options represent different financing avenues. Borrowing money through bank loans falls under debt financing rather than equity. Using retained earnings for business growth pertains to reinvesting profits into the business without seeking external investors. Applying for government grants involves seeking funding that does not have to be repaid but typically comes with specific compliance requirements. Each of these options serves different purposes in financial management and growth strategies.

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