What does equity financing involve?

Equity financing involves raising capital by selling a portion of ownership in the company to investors in exchange for funds. This approach allows businesses to gather the necessary resources to grow and operate without the burden of debt that comes from loans.

When a company opts for equity financing, it typically means that it issues shares or equity interests to investors, who then become partial owners of the business. This can be an appealing option for startups or businesses seeking to expand but may not qualify for traditional bank loans or prefer not to take on debt.

In contrast, the other options presented do not align with the concept of equity financing. Taking out a loan for operational costs represents debt financing, where the company incurs a liability that must be repaid. Acquiring funds from government grants does not involve giving up ownership—they are usually provided without the expectation of repayment, thus not affecting equity. Finally, reinvesting company profits into expansion is a method of using retained earnings rather than raising external capital by diluting ownership. Understanding these differences is crucial for effectively navigating financing strategies in a business context.