Today we find hundreds of start-ups in diverse fields and industries; all wanting to either stabilize or develop their business within a short period. But, to ensure the rapid growth and development of their company, almost every small business person requires effective funding. This is when equity funding comes into play. So, let’s see What is equity financing?
Equity investors provide an organization with finance to increase their growth in exchange for a long-term stake in the structure of the organization. Mainly there exist six types of equity financing i.e. Initial Public Financing, Small Business Investment Companies, Angel Investors for Equity Financing, Mezzanine Financing, Venture Capital and Royalty Financing.
No Interest-Based Instant Repay
One of the main reasons why equity funding is more suited to small businesses or start-ups is that it is free from the obligation to repay the double value of funds acquired through investors. But, due to this, it is equally challenging to attract equity investors instantaneously. Equity investors only show willingness in a company which they seem to be highly successful and reward them with a handsome mark-up on their investment.
Unlike debt financing, a small business owner is independent to exercise the realm of his business without contemplating over the hiking interest rate, if not able to return the loan timely. Also, equity funding does not require any monthly payables to the investors deducted from the investment funds. This releases a great amount of stress over the shoulders of an entrepreneur who is already surrounded by plenty of challenges at hand.
Investors with Experience
Every small business owner or entrepreneur needs an experienced and insightful mind to assist the business during challenging times. Since, an investor who has once committed his finance in your business, is your equal partners in its profit and loss; therefore, he is always available to lend you valuable support and advice. And, if your business is doing well to his expectations then chances are bright that he might double the investment, even without having you to ask…
Similarly, some angel investors and venture capitalists can offer you their valuable contacts and strategy tips to help you avoid many potentials hurdles. Moreover, Royalty Financing – a form of Equity Financing enables the borrowers to grow freely without concerning about the immediate benefits of the investor. Royalty investors only demand an agreed share of profit per sale, providing a concern-free run to the borrower.
Rapid Growth of Shareholders
Another valuable aspect of equity financing is that if your business is heading in the right direction, you get more company shareholders in a brief passage of time. Each shareholder comes with a gainful portfolio hence, granting you a wider market exposure, client chain, and contacts.
Equity fundraiser has what it takes to bring in more money than debt alone can. It doesn’t merely fund a launch, but also enables it to survive and work at its full potential. Interesting, isn’t it? Equity fundraising has a positive impact on the growth of a business. The recent talk of Elon Musk about trying to get control of the Tesla private is laced with these concerns.
Funds Distribution Flexibility
The biggest draw of using equity is flexibility in distribution. If you aren’t making any profit, that means you don’t have any debt service, either any constant drain or any stress. This enables entrepreneurs to frame powerful decisions that would benefit their enterprise in various ways rather than being compelled to make rash ones that would lead to crippling down of their new businesses only to pay the loan by facing so many hindrances.
What matters more than cash is bringing in the equity partners, who are interested in seeing you succeed and seeing your business grow. Partners with the right connections and influence, without any doubts, would take your business to new heights. Securing an attractive debt also becomes a piece of cake with equity partners.
When applying for a loan, good credit history is essential to secure it. If your business has a poor financial history, then applying for debt financing is a bad idea, instead, take advantage of equity financing. All control over business money and financial matters, strategies, and planning belong to major equity stakeholders in organizations financed highly by equity. Banks need an approximate contribution of 20 to 25 percent by the equity, to finance the rest 75 to 80 percent obligation.
No Fixed Requirement
Organizations with low equity finance show a high growth rate and smooth operation, which in turn is easier to acquire debt finance in times of need. There are no fixed requirements for payment in equity financing. As a result of which there is no increase in the company’s fixes rates or payment burden. The dividends paid to the investors could be deferred and that money could be used to avail business opportunities and for operations. There is no such requirement as a pledge of collateral. Business assets remain available to serve as security for debts. Also, assets bought with equity money can be utilized to secure long term loans in the future.