For those on the outside looking in to the business world, most people expect to see debt financing as the most common way to get a business off the ground. While yes, there are many companies that are reliant on small business loans early on or other types of loans to grow, the most common type of business funding you are going to see is equity funding. While it is generally used as seed money for startups or additional capital for times of expansion, meeting those goals means having a full understanding of what this means for your company.
Generally, rather than asking a lender or institution for a loan, equity funding is based on selling shares of the business, with each share representing a unit of ownership in the company. Larger companies tend to offer different tiers of shares to appeal to investors who are interested in certain goals, like a dividend, voting rights, or both.
There are three main types of equity funding sources that business owners are going to see, especially early on:
Self-funding: Technically, using savings, inheritances, or the sale of personal assets as seed money qualifies as equity funding.
Angel investors: Generally, an angel investor is either a personal associate or wealthy group of individuals that provide financial backing through equity. However, this generally applies to sums under $500,000, so many businesses will need additional funding to meet their goals.
Venture capitalists. VC firms are professional, qualified investors, and while they have the most money to put into a business, they are also the hardest to appeal to due to their standards as well as the fact that many only cater to certain niches. In addition, many venture capitalists take an active role in the company, which has positive and negative connotations.
One other thing that is worth mentioning is equity funds. These mutual funds or private investment funds buy ownership in businesses via amassing shares and search for companies with the best chance to grow.
When it comes to equity funding over debt-based funding, the main advantage that you have as a business owner is not having to repay the money that you acquire. Granted, there is the expectation from your investors that your company will be successful and provide the necessary ROI that they want, but this isn’t done through a formal payment plan with interest like you would see with a business loan. In addition, some debt financiers may put restrictions on how you use the funds they provide, keeping you from taking advantage of all the opportunities on the table.
However, you need to understand while you may have financial responsibilities, there are other things that you give up to a certain extent with equity funding; namely, a certain tier of control. Offering ownership means that you have to give your investors and shareholders a voice in certain decisions, so you need to be prepared to have their thoughts in mind. In addition, many angel investors and venture capitalists may put this as one of their provisions before providing any sort of funding, so make sure that these are entities you are comfortable working and partnering with.
Debt and equity are both viable forms of funding for companies in different situations with different goals, which is why it is so important for those in charge of securing funding to understand what options are on the table as well as where things stand with your business’s financial status. This is where companies like PrimaryMarkets come in, serving as a global independent marketplace that lets wholesale sophisticated investors take part in secondary trading of securities and investments. In addition, we also help unlisted companies and trusts raise new capital.