In the long term, equity financing is considered a more expensive form of finance compared to debt. That is because investors demand a higher return than lenders do. Investors have a high risk when funding a company, and thus demand a higher return.

Compared to debt, equity investments offer no tax shield. Dividends distributed to shareholders are not tax-deductible expenses, but interest payments are tax-deductible. It adds to the cost of equity financing.

Many venture capitalists demand an equity stake of 30%-50%, particularly in cases where the company lacks a strong financial background. Most company founders and owners are reluctant to dilute that amount of corporate power, which reduces their alternatives for equity financing.

Disadvantages of Equity Financing
1. Dilution of ownership and operational control
The main disadvantage to equity financing is that company owners must give up a portion of their ownership and dilute their control. If the company becomes profitable and successful in the future, a certain percentage of company profits must also be given to shareholders in the form of dividend

Their successful backgrounds enable them to provide priceless help in the form of business contacts, management experience, and access to other sources of capital. Many angel investors or venture capitalists will help companies in this way. It is critical in the startup stage of a company.

2. Access to business contacts, management expertise, and other sources of capital
Company management receives some benefits from equity financing too. Some investors are interested in the working of the business in which they invest and individually interested in being part of it toward its development

Investors usually look at the long term without expecting a short-term return on their investment. It enables the company to reinvest the cash flow from its operations to grow the business rather than focusing on debt repayment and interest.

The primary benefit of equity financing is that it provides a source of alternative funding to debt for companies. Small start-ups that may not be qualified to obtain large bank loans can access funding from angel investors, venture capitalists, or crowdfunding platforms to finance their needs. In this case, equity financing is perceived to be less risky compared to debt financing since the company will not have to repay its shareholders.

Companies that are quite well-established can raise finance with an initial public offering, or IPO. IPO is a method of raising finance where companies allow its share to be traded in capital markets by offering it to the public.

Corporate investors are large companies which invest in private companies to provide the needed funding. The investment is usually created for the purpose of establishing a strategic partnership between the two companies.

These are firms that make investments in businesses they believe will grow fast and appear on stock exchanges later. They invest a larger sum of money into businesses and acquire a larger stake in the company compared to angel investors. The method is also referred to as private equity financing.

Crowdfunding platforms allow many people in the public to invest in the company in small amounts. Members of the public decide to invest in the companies because they believe in their ideas and hope to earn their money back with returns in the future. The contributions from the public are summed up to reach a target total.