Equity financing differs from debt financing, which involves borrowing from a lender and paying back the money with interest. Equity financing involves selling your business shares to various investors to raise the capital needed to sustain the business.
Common Types of Equity Financing:
Angel investors:
These investors see potential in business early on and thus help it get going. Anyone from a relative to a retired venture capitalist could qualify as an angel investor. They either provide the capital in one shot or can allocate funds to the company as it experiences growth. They usually want to help in terms of not only the financial aspects of the business but also as guides, helping with business processes and any other area in which they may have expertise.
Venture capital:
These people are similar to angel investors in that they work with you to get the business up and running. They are committed to increasing your small business’s value, which is why they decided to invest in the first place. They realized, in your vision, the potential for significant growth. In deciding to work with a venture capitalist, you do need to take the time to see who might be the best fit. And also, you need to decide how much stock you’re willing to give in exchange for capital. The money here is usually distributed as the company continues to grow.
Friends and family:
If you’re perhaps looking to start a bit smaller in procuring capital, you might approach friends and/or family members. They already know you, trust you, and maybe a more practical choice depending on your business and goals. However, you always want to treat the relationship as a professional one. You should take a few precautions when working with a friend or family member. For one, it is a good idea to get an attorney involved. They can help more clearly define the relationship; this way, if something does arise, an attorney will be familiar with the situation and help resolve the conflict.
Crowdfunding:
A relatively new phenomenon, crowdfunding has become a trendy way for companies to raise money. With Kickstarter and Indiegogo, you can pitch your idea to the masses. Anyone who is intrigued and does want to help can do so by contributing to your campaign. In return, they generally get a gift, discounts, early bird specials, what have you.
Benefits of Equity Financing
- You get more capital flexibility: You don’t have to make monthly payments which frees up capital to devote to your business.
- Your credit score is less of an issue: Although an investor may want a credit check, they’re more focused on the value and potential of your company.
- Learn from your partners: Angel investors and venture capitalists most likely have expertise in some business areas. Access to this type of information is invaluable.
Disadvantages of equity financing:
You must share the rewards: Investors need to get paid. If you start making profits, you will most likely have to share. So your portion of the money earned will be smaller.
You give up control: Angel investors, for instance, usually want to help with business processes by giving guidance. You could even be outvoted when it comes to major company decisions. Equity financing can be a big commitment, especially if you want more business control.
Choose First Union Lending to Provide You With Equity Financing
Alternative lenders like First Union Lending can provide more freedom than equity financing. First Union Lending offers numerous financing programs designed with small businesses in mind. Our business loans are fast and flexible, with financing options ranging from $5,000 to 2 million dollars. Call today to learn more about our various financing solutions to help your business grow and become successful.