Guide to Equity Financing

Equity financing is where you trade ownership of your business in return for their capital. To obtain equity financing you can get it through a venture capitalist, angel investors, and family and friends. Before seeking equity financing, there are a few things you need to know to secure it.

What Is Equity Financing?

Equity financing is a common way for businesses to raise capital by selling shares. It is typically used for business startups or those businesses that are wanting to expand. The investor is taking a risk in equity financing, if the company does not do well, they lose their investment.

Any business can qualify for equity financing in order to grow. Equity investors are looking for a way to capture profits.

The Pros of Equity Financing

No repayment necessary: you do not have to repay a loan with interest and fees. This will let you hang on to the capital you have and reduce the risk of cash flow problems. The lack of repayment can benefit startup owners who want to have more capital in the beginning.

Valuable business advice: your investor may connect you with others in your industry to help you expand your knowledge and business.

Large funding: investors provide large funding amounts which can be a big advantage for your business. Angel investors invest less than venture capital firms it is still quite a large money.

You can borrow later: you can avoid making regular debt payments by raising equity which will make it easier to qualify for a loan later.

The Cons of Equity Financing

Loss of ownership: you will no longer be the sole owner of your business and you will not keep all your future profits.

Investors are controlling: investors have the power and they may make decisions that you may not agree with.

Time consuming: pitching investors can take some time and they make require a thorough business plan so they can be sure your business will be secure and profitable.

Legal costs: equity agreements need to be reviewed by attorneys even if you are raising funds from family or friends so be prepared to have legal costs.

Types of Equity Financing

Angel Investors: these are typically family or friends who will invest in your business at its early stage. The funds can be provided by the angel investor all at once or will disperse the funds in a strategic way as dictated by the growth of the business.

Venture Capital: these investors provide funding to select businesses, the businesses need to be professionally managed and have a strong competitive advantage in their industry. Venture capitalists invest in private businesses with the goal of turning it into a public company and they invest in the business with over $1 million.

Crowdfunding: with crowdfunding you can raise money for your business online. You can use platforms such as GoFundMe or AngelList to begin collecting funds for those who support your business.

Is Equity Financing Right for You?

Before you receive equity financing, you should take the time to understand exactly what it entails. Be sure to understand the length of the relationship, the equity you are giving away, and the types of shares you are giving. The best types of candidates are those who are:

  • Looking for massive growth
  • Considering an IPO
  • Not able to secure debt financing based on creditworthiness
  • Wanting to avoid monthly payments for access to capital

Raising capital for a business will depend on the unique qualifications and there are plenty of financing options available. Be sure to consult with a professional before agreeing with whichever route you take.