Share financing means ownership capital and finance. Usually small scale businesses such as partnerships and sole proprietors are run by their owners through their own financing. Share companies operate on the basis of shares but their management differs from shareholders and investors.
Merit of Equity Finance.
The following are the benefits of capital financing.
Solid in nature. Share financing is permanent in nature. It is not necessary to pay back unless liquidation occurs. Shares that were sold remain on the market. If any shareholder wants to sell these shares he can do it on the stock exchange where the company is listed. However this will not entail any liquidity problems for the company.
Solvency. Equity Finance increases the solvency of the company. It also helps to increase the financial position. In times of need the share capital can be increased by inviting public offerings to subscribe for new shares. This enables the company to successfully meet the financial crisis.
Credit value. High capital financing increases creditworthiness. A company where equity financing has a high share can easily take loans from banks. Unlike the companies that have a serious debt burden they are no longer attractive to investors. A higher proportion of capital financing means that less money will be needed for interest payments on loans and financial expenses so much of the profit will be distributed between shareholders.
No interest. No interest is paid to any third party in equity financing. This increases the companys net profit that can be used to expand business scales.
Motivation. As with the equity financing all profits remain with the owner so it gives him the motivation to work harder. The sense of inspiration and care is greater in a company financed by the owners own money. This keeps the businessman aware and active in seeking opportunities and earning profits.
No Risk of insolvency. Since there is no borrowed capital no repayment is required in a strictly limited schedule. This makes the entrepreneur free of financial worries and there is no danger of insolvency.
Liquidation. In the event of liquidation or liquidation there is no additional fee on the assets. All assets remain with the owner.
Increasing capital. Joint stock companies may increase both issued and authorized capital after meeting certain statutory requirements. So in times of need financing can be increased by selling extra shares.
Macro Level Benefits. Share Financing Provides Many Social and Macro Level Benefits. First the factors that are of interest to the economy are reduced. This makes people trees of economic concern and panic. Secondly the growth of public limited companies enables a large number of people to participate in the profit without actively participating in the administration. Thus people can use their savings to make money for a long time.
Demerits of Equity Finance.
Below is the decline in capital financing.
Reduction of working capital. If the majority of the business is invested in fixed assets the business can feel a shortage of working capital. This problem is common in small scale companies. The owner has a fixed capital amount initially and most of it is consumed by fixed assets. So less is left to meet current expenses for the business. In large scale business operations financial mismanagement can also lead to similar problems.
Difficulties in Regular Payments. In the case of capital financing the businessman may experience problems with making regular and recurring payments. Sales revenue may sometimes fall due to seasonal factors. If sufficient funds are not available it would be difficult to meet short term liabilities.
Higher taxes. Since no interest has to be paid to any outsider taxable income from operations is greater. This results in a higher tax rate. Furthermore there are double taxation in some cases. At limited companies the entire income is taxed before any appropriations. When dividends are paid they are taxed again from the recipients income.
Limited expansion. Due to capital financing the businessman can not increase the business scale. Expansion of the business needs significant funding to establish new plants and capture more markets. Small scale companies also have no professional guidance for them to expand their market. There is a general tendency that owners try to keep their business at such a limit that they can keep an eye on it. Because business is funded by the owner himself he is very obsessed with the chances of fraud and forgery. These factors hinder the expansion of the business.