If you are looking for ways to startup your business you may be considering using equity financing.The more traditional path has been to use debt financing which it to take on a bank or private loan thereby securing your business with debt.However many small business owners today are not wanting to assume so much debt so they are more heavily considering using equity financing. With equity financing you will sell shares of your company to investors, injecting your business with cash and leaving the investor with the chance to make a high return.
There are many positive aspects to using equity financing.Some of the pros of equity financing are:
- This type of financing allows you to cut out the bank as a potential business partner.Instead of spending your cash on loan repayment you can use it to grow your business.
- Using equity investors helps to reduce your personal risk in the business.
- You are more protected if your business fails.This is because if you have assumed debt you would still be required to pay back any bank loans you take, or reorganize the debt payment under bankruptcy protection. Equity investors, however, usually do not have the same rights as debtors and you would not be required to return their original investment in the event your business collapses.
- Equity investment can be viewed as a long-term solution and a means to inject both cash and experience into your startup small business.
- Even with all of the positive aspects of equity financing it is crucially important to realize that there are negatives as well. Some of the cons of equity financing can include:
- This is not a good solution for the short term. Most investors want their capital to help the company make good investments and position itself for medium- and long-term growth.
- You will have to give some control over your company’s operations if you offer stock to investors.
- Along with sharing control remember that you will be sharing the profits as well.
Every small business owner should consider what their long-term strategy is for their business. It is important to understand that shareholders will be looking for a plan to get a return on their investment, and that plan could include merging with another company, selling the company to a larger firm, or conducting a public stock offering which would then allow investors to sell their stock on the open market. You should also make sure to run the calculations on any potential equity agreement since you may find that you are paying a larger percentage of your profits to investors than you would toward a bank loan.
If you have decided that equity financing is right for you and your business here are some sources of equity financing:
- Venture capitalists-These types of funds are professional investment organizations that invest in growing industries in order to make a profit. The basic premise of these firms is that they know several of their investment choices may not pan out but are willing to take that risk in return for an occasional windfall. The upside to this type of financing means that securing a venture capital firm that specializes in your industry means you will be bringing in owners who can offer experienced opinions on running the company but keep in mind that they may also seek to exert significant control.
- Angel investors-These are individuals who have a personal stake in seeing a business proposition succeed. Angel investors typically tend to focus their investments on sectors in which they have a personal interest. The equity arrangement with an angel investor is similar to that of a venture capitalist.
- Initial public offerings-This can happen depending on the nature and stage of development of the company.It may be possible to raise funds by offering shares in the company to the public. Keep in mind that this activity is highly regulated and expert advice should be sought prior to embarking on this route.
- Corporate venture capital-This is a type of capital that is provided by established companies in return for a stake in your business.