Which financing option involves exchanging ownership for capital?

Equity financing is the process of raising capital by selling shares of ownership in a business. When a company opts for equity financing, it invites investors to contribute funds in exchange for a stake in the business. This means that investors gain partial ownership, and with this ownership, they may receive dividends and have a say in the business operations, depending on the amount of equity they hold.

Essentially, equity financing allows the business owner to obtain essential capital without incurring debt, as it does not require repayment like a loan would. Investors are motivated to invest in startups and businesses with growth potential, hoping that as the company grows in value, so will their investment. This option is particularly appealing for businesses that may not have sufficient credit history or assets to secure traditional loans, allowing them to leverage external resources to fuel growth while sharing the risks and rewards with their investors.

Debt financing, on the other hand, involves borrowing funds that must be repaid over time, typically with interest. Grants provide funds that do not require repayment under certain conditions, and bootstrapping refers to self-funding a business using personal savings or revenue generated from the business itself. None of these options involve exchanging ownership for capital in the same way that equity financing does.