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What is Equity Financing?

If you are looking for funding for a new business you have a lot of options open to you, from financing the project yourself, borrowing money from friends of family or using equity financing from private investors from all over the globe.

What exactly is equity financing? Simply put, equity financing is a means of financing a venture through giving away equity or shares in your company in return for funding.

This means that an outside investor will own a part of your company. Whilst many entrepreneurs may not want to give away equity in their company to a third party, in some cases it is the only option to get a business off the ground in the first place.

Launching a brand new business can be expensive, and it can be difficult for entrepreneurs to find the money to launch a new business. Even if they have the initial seed capital to begin their venture, this is only the start of the financial issues and problems that can typically occur.

For many businesses once the enterprise is underway, it can be difficult to keep the business running as cash flow can be tight. This means that there is a fairly short window of opportunity for small business owners to make a success of their business.

If a business runs out of money before it establishes itself in the marketplace, no matter how good the concept of that business is, it is doomed to fail.

This is why many business owners turn to equity investors to help them keep their business running. The entrepreneur will lose a stage in their business, but at least that business will still be afloat and running. It will also have an injection of cash into the business that can help it grow and move to the next level.

Equity financing can come from a number of different sources. Types of equity financing could come from angel investors, venture capital firms, private individuals, or even from IPO. For startups and brand new businesses angel investors and private individuals tend to be the more common sources of equity.

How Equity Financing Works

When looking to carry out equity financing it is important to decide just how much money you require and how much equity you are willing to give away in your business. Remember that you will want to keep a controlling stake of the business so if you have multiple investors providing money for your business the percentage of equity that they are given needs to be lower than your total stake or you could loose control of your company.

Whilst you are likely to have to report back on the success of your business to your investors on a regular basis, private investors are unlikely to want to help you run your business, therefore you will likely still be in control of your company.

That is not to say that you might not be able to leverage the wealth of experience that angel investors and equity investors bring to the table. Since these groups and individuals have a stake in your business, that equates to part ownership this means they will have a vested interest.

Often inexperienced or green entrepreneurs that are new to the business world can find that angel investors will provide advice and can also open doors to their own network of contacts, which can help new businesses take off. Ultimately, as the entrepreneur will retain the majority stake of their business, and the overall decision making will remain with the business founder, who will retain the control of the company as the major share holder.

Obviously one of the main cons of equity financing is that an entrepreneur will lose a portion of the company that they own and introduce business partners into the organization. So while an entrepreneur might retain control they will still have others to answer to, and they will have voting rights, which can lead to difficult conversations.

Another financing option that is popular is crowdfunding, but with this it is less common to offer equity as a part of the investment. Here, companies tend to offer an incentive or reward in return for small investments from a large number of people.

As a business grows, the entrepreneur may reach a point that they need to have additional stages of raising equity funds. At this point it is possible that venture capital firms may show an interest as sources of equity. Often, venture capitalists are interested in businesses that are on a fast-track to growth, and they may be involved closer to the time that a business looks to go public with an IPO (Initial Public Offering).

Benefits of Equity Financing

Whilst there are other ways to raise money for your business, from grants to bank loans, in many cases new businesses do not qualify for this form of funding. This is why the emergence of equity financing companies and private investors is increasing.

Therefore if you are looking to launch a business venture and do not mind giving away equity in that business to private investors then you have a much better chance of raising the money you need to begin your company.

One of the main benefits to equity investment is that it can open the door to finance that would normally not be accessible to early-stage companies.

Often new businesses look to traditional financial institutions for a business loan. However, most banks will not provide loans to startups leaving the entrepreneur to either fund the business themselves via their own personal wealth or credit cards, which is not a preferable option for most business owners due to the high interest rates on the loan payments. Financing a business on a credit card is really a short-term strategy and as a source of funding is one to be avoided for most entrepreneurs.

The reason that banks will not provide a line of credit to a new business is because they look at the track record of a business and want to see a positive valuation and find that the business is operating with a healthy balance sheet- two things a brand new business cannot provide.

Since launching a new business is a risky prospect, traditional lenders will not usually provide any amount of money to a private company in the early stage since they look to reduce their risk. This is where private equity investors come into the picture as potential investors. These kinds of investors will look for opportunities that they can invest in that potentially offer a high rate of return.

However, angel investors will still do their due diligence so any entrepreneur will need to have completed a comprehensive business plan for the business.

The good news is that if you relinquish an amount of equity in your business to an investor, this means that there would not be any loan repayments needed, which would be the case with a traditional lender, or if you finance your business expansion by taking a personal loan.

How the Angel Investment Network Can Help

If you're reached a decision that you need to look for outside investment to take your startup to the next level, then the Angel Investment Network can help.

The Angel Investment Network is a global enterprise which connects angel investors and high net worth individuals with those around the globe who can provide a range of different financing options for entrepreneurs.

Entrepreneurs can sign up to the Angel Investment Network to make connections with investors. Simply post details of your project and investors around the world can search and find enterprises that they are interested in and see potential in.