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What is Equity Funding?

By Osmand Vitez
Updated Jan 22, 2024
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Equity funding is a dual purpose finance term. In personal finance, equity funding represents an insurance policy paid for by a mutual fund. The value of the mutual fund shares pays the premiums of the insurance policy, allowing individual investors to have the advantage of insurance policies, along with the growth potential of a traditional mutual fund investment. In business, equity funding represents the amount of external financing companies use outside of traditional bank loans and other debt instruments.

Equity funding relating to the personal investment of insurance policies paid for by mutual funds was a common investment sold by the now-bankrupt Equity Funding Corporation of America. These investment vehicles were seen as highly controversial when first issued in the personal finance market. During the 1960s and 1970s, Equity Funding Corporation of America was found to have conducted massive accounting fraud relating to securities investments, including personal equity funding investments. Following this negative attention, these personal investments became very unpopular with investors and their use in securities markets declined significantly.

Business equity funding is often called equity financing in the business environment. Equity financing often represents capital invested from private investment firms, other companies, and individuals into a business. Equity financing is usually used to pay for major asset acquisitions or new business growth opportunities. Businesses use equity financing to avoid the lengthy process involved with obtaining traditional bank or lender loans and the fixed cash repayments that are associated with bank debt. While private investment firms or other companies may invest funds directly into a business’ operations, individual investors usually purchase company stock when making equity investments.

Businesses often use formal written agreements or contracts when securing equity funds from private investment firms and other companies. These documents include the amount of the initial investment, guaranteed rate of return offered by the business, the time period before the business must repay the investment and other various contractual terms. Businesses that allow investment firms or other companies to purchase a significant equity stake in their operations may be subject to a subsidiary relationship with these investors. A subsidiary relationship often allows the investor to review key internal documents and have a say in specific management decisions relating to the company.

Individual private investors usually make equity investments by purchasing company stock through an online trading house or equity brokerage. Stock is usually obtained at an open market price through a national equity securities exchange. These exchanges usually buy and sell numerous shares of stock relating to various companies in the business environment. These transactions relate to increases or decreases in the amount of equity financing available to companies for growing or expanding business operations.

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