Equity financing is a financing method where a company sells shares of its ownership to raise capital. Large public companies and small private businesses can use equity financing to raise funds.
For example, to raise the money to buy an important piece of equipment, you sell one-third of the ownership of your small business to your brother. This process is considered private equity financing.
The advantage of equity financing is that a business doesn’t have to pay back the funds it raised, because the funds aren’t a loan. The disadvantage of this financing method is that a business owner has to give up part of the ownership of the business. The new owners may have different business interests, and the divergence of interests could lead to conflicts.