We are glad to have you with us for our 1st Session on Equity –The Importance of Equity to Business
Alright so let's get started...
The Importance of Equity to Businesses
Many people aspire to start their own business
but many a times they cannot, for variety of reasons.
Building a business
or creating a brand is not an easy thing to do
. It takes a lot of effort and skills to commence a business and run it successfully.
Capital is the key
- Finance is the lifeblood of any business No business can survive for even a single day, in absence of finance. So, having adequate capital is critical for starting your own establishment. Capital can either be...
- Owned Capital
- Borrowed Capital
The benefits to investors...
- A company not having adequate monetary resources would usually borrow from banks or other sources, but this may not be viable in the long run due to the interest cost involved.
- Hence as a long term source of finance, owned funds are more suitable.
- Thus Companies issue equity shares thereby offering a share in ownership of company to its investors.
- The equity shares issued and paid up become the owned capital of the company
Pros and Cons of raising money through equity...
- Shareholders get to participate in the business of the company through the voting right conferred. However the management of the company is left to professional hands or to the founders.
- Shareholders are entitled to a share in the profits earned by the company in the form of dividends as they invest money in the company’s prospects for the long term.
- No prefixed rate of interest to be paid on equity shares as in case of borrowed funds
- Dividends are distributed subject to profits earned and policy adopted by the company
- But Equity as a source of finance is relatively expensive vis-à-vis raising money through borrowed funds.
- This is because a tax benefit can be availed for the interest paid on borrowed funds, while dividends are appropriation of profits which are not tax deductible.