Whenever our clients ask us to secure funding for them, the first thing we need to do is to establish what type of funding would be best for them, i.e. equity or debt financing.
Following our blog on debt as a source of finance last week, let us examine this week equity as a source of finance.
Selling shares of the company is one way to get funds through equity financing. Both existing businesses looking to grow and new ones in need of funding may use this kind of financing. When a company chooses equity financing, it cedes partial ownership to the investors.
Notwithstanding the fact that the business owner can contribute personally, there are additional sources of external equity financing. These include:
Angel investors: These are the people who make investments in small companies to assist in their early development. Typically, it is a one-time assistance with negotiable terms and conditions. Angel investors are often wealthy individuals who provide funding in return for stock or shares in the company.
Venture capitalists: In the same way angel investors acquire shares from the company or business they are funding, venture capitalists are experienced investors who support expanding companies. A venture capitalist is extremely fastidious about the types of businesses they support financially, and specifically chooses businesses with strong potential for growth, such as IT firms. This is because venture capitalists often anticipate far higher returns on their investment than do angel investors.
Corporate investors: These are organisations that make investments in other companies. Acquiring control of a company by purchasing the majority of its shares or investing in another company that has the potential to grow its business significantly might be the driving force for this type of investment.
Crowdfunding: This is a type of equity financing where money is raised in modest amounts through contributions from several people. It makes use of internet forums where a number of investors can fund companies or projects.
Friends, family, and colleagues may also be a source for providing external equity finance to a new business.
Although equity financing offers the benefit of being adaptable in terms of accessibility and repayment alternatives, it also has the following drawbacks:
Loss of control: The majority of investors trade financial support for company ownership. An entrepreneur may not ultimately have as much control over his or her company at the end of the day.
Time-consuming: Entrepreneurs expend time in searching out and persuading investors, which can distract them from their primary business.
A high level of accountability to investors: A strong business plan is essential since prospective investors will want details on every area of the company.
Conflict: This can arise from having several investors in a company, particularly when making decisions, as they say too many cooks spoil the broth.
Depending on the form of equity financing the company contemplates, a strategy must be developed to make sure it is in line with the long-term goals of the firm.
Email us at: enquiries@ovacgroup.com for a free consultation with our team specialists to help you to identify and obtain the appropriate funding for your business.