What is the definition of equity financing?

Equity financing refers specifically to the method of raising capital by selling shares or ownership interests in a business. When a company chooses this route, it offers ownership stakes in exchange for funds, which can then be used to fuel growth, support operations, or invest in new projects. This approach not only provides the necessary capital for the business but also allows investors to share in the potential profits and success of the venture, as they gain equity in the company.

In contrast, options that involve borrowing funds from financial institutions would classify as debt financing, which requires repayment over time with interest. Using retained earnings for business expansion involves reinvesting profits already generated by the business, rather than seeking external funding. Lastly, acquiring financial assistance through grants and donations typically does not involve selling ownership in a business and is often used by non-profits or organizations aiming to fund specific projects. Therefore, the choice defining equity financing as raising capital through the sale of shares best captures its essence and operational function within a business context.