Merits and Demerits of Equity Finance

Equity finance means the proprietor, personal funds and finance. Usually small scale enterprise corresponding to companionships and sole proprietorships are operated by their owner trough their own finance. Joint stock corporations operate on the basis of equity shares, however their administration is totally different from share holders and investors.

Merits of Equity Finance:

Following are the merits of equity finance:

(i) Everlasting in Nature: Equity finance is everlasting in nature. There is no must repay it unless liquidation occur. Shares once sold remain in the market. If any share holder wants to sell those shares he can do so within the stock exchange where company is listed. However, this is not going to pose any liquidity problem for the company.

(ii) Solvency: Equity finance will increase the solvency of the business. It additionally helps in rising the monetary standing. In occasions of need the share capital will be increased by inviting offers from most of the people to subscribe for new shares. This will enable the company to successfully face the monetary crisis.

(iii) Credit Worthiness: High equity finance increases credit worthiness. A business in which equity finance has high proportion can easily take loan from banks. In distinction to these companies which are beneath severe debt burden, no longer remain attractive for investors. Higher proportion of equity finance signifies that less money will be wanted for cost of interest on loans and monetary bills, so much of the revenue shall be distributed amongst share holders.

(iv) No Interest: No interest is paid to any outsider in case of equity finance. This will increase the net revenue of the business which can be utilized to expand the scale of operations.

(v) Motivation: As in Physician Equity finance all of the profit remain with the proprietor, so it gives him motivation to work more hard. The sense of inspiration and care is greater in a business which is financed by proprietor’s own money. This keeps the businessman acutely aware and lively to seek opportunities and earn profit.

(vi) No Danger of Insolvency: As there isn’t a borrowed capital so no repayment should be made in any strict lime schedule. This makes the entrepreneur free from monetary worries and there’s no danger of insolvency.

(vii) Liquidation: In case of winding up or liquidation there is no such thing as a outsiders charge on the assets of the business. All of the assets stay with the owner.

(viii) Growing Capital: Joint Stock companies can increases both the issued and authorized capital after fulfilling sure legal requirements. So in occasions of need finance may be raised by promoting additional shares.

(ix) Macro Level Advantages: Equity finance produces many social and macro stage advantages. First it reduces the elements of curiosity in the economy. This makes folks Tree of economic worries and panic. Secondly the growth of joint stock corporations allows a great number of individuals to share in its revenue without taking active half in its management. Thus individuals can use their financial savings to earn monetary rewards over a protracted time.

Demerits of Equity Finance:

Following are the demerits of equity finance:

(i) Decrease in Working Capital: If majority of funds of enterprise are invested in fixed assets then business could feel shortage of working capital. This drawback is common in small scale businesses. The owner has a fixed amount of capital to begin with and major proportion of it is consumed by fixed assets. So less is left to meet current bills of the business. In giant scale business, financial mismanagement may also lead to comparable problems.

(ii) Difficulties in Making Common Funds: In case of equity finance the businessman might really feel issues in making payments of normal and recurring nature. Gross sales revenues typically may fall due to seasonal factors. If ample funds will not be available then there can be difficulties in meeting short time period liabilities.