What is equity financing?

Equity financing refers to the process of raising capital through the sale of shares in a company. When a business opts for equity financing, it is essentially offering a portion of ownership to investors in exchange for funds. This method provides the company with capital that does not need to be repaid like a loan, but it does mean sharing future profits and decision-making rights with the shareholders.

When a company sells shares, it can attract both retail and institutional investors. This can be done through private placements, public offerings, or existing shareholders selling their shares. Equity financing is often an appealing option for startups and growing companies that may not have sufficient credit history to secure traditional loans.

In contrast, the other choices refer to methods of financing that involve debt or retained earnings, which are not classified as equity financing. Borrowing funds or taking loans indicates leveraging debt that must be repaid, while using retained earnings involves reinvesting profits rather than raising new capital from external investors.