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Companies that are short on cash may need financing to pay for short-term needs or long-term capital expenditures.

There are two kinds of financing — equity financing and debt financing.

Debt financing happens when a company gets a loan and promises to repay the loan over time, with interest. 

Equity financing means the company raises money by selling ownership shares in the business. It is used both by start-ups raising money to open the business, and publicly traded corporations selling shares to finance major asset purchases. Equity financing is highly regulated in the United States at both the state and federal level. 

Entrepreneurs and businesses choose equity financing over the alternative of debt financing for several reasons. For the entrepreneur, equity financing is often the only option.  Start-ups fail at a very high rate.  Because of this, banks often will not loan money to an entrepreneur.  

For a large corporation, equity financing is sometimes chosen over debt when it’s less expensive to sell stock than to pay the interest cost of debt financing. 

There are a number of different options for the type of equity used.  Instead of common stock, investors might ask for convertible preferred shares in the new entity in order to receive a greater upside along with downside protection. At other times, the equity might be common stock that includes warrants making the deal better for the investor.

 

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