When starting up your business there are a few different ways to raise funds. The usual path is debt financing, which involves taking on a bank loan or private loan. Another approach is to pursue equity financing by issuing stock in your business. This allows you to sell shares of your business to investors. This gives your business cash and leaves the investor with a chance to make a higher return.
Pros of Equity Financing
Equity financing allows you to cut out the bank as your business partner. Instead of spending your cash on loan repayments, you can use the cash from equity investors to grow your business. This helps reduce your personal risk in the business. If your business fails you would be required to pay the bank back on any loans you take, but equity investors don’t have the same rights as debtors. You would not be required to return their original investment if your business fails.
Cons of Equity Financing
If you’re looking for cash for the short term, offering equity is not the right choice. Investors want their capital to help the company make good investments and position itself for medium and long term growth. If your cash flow hasn’t picked up as you expected, you may want to get a bank loan or private loan. If you decide to offer equity, you’ll have to surrender some control over your company’s operations if you offer stock to investors.
You need to consider what your long-term strategy is for your business. Shareholders will want a plan to get a return on their investment in your business. That plan could include merging with another company, selling the business to a larger firm, or conducting a public stock offering. Along with sharing control, you will also have to share the profits. You will need to make sure to run the calculations on any potential equity agreement. You may find that you’re paying a larger percentage of your profits to investors than you would toward a bank loan.
Some Sources of Equity Financing
- Venture Capitalist. Venture capital funds are professional investment organizations that invest in growing industries in order to make a profit. These firms know several of their investments may not work out, but are willing to take that risk in return for an occasional win.
- Angel Investors. These are individuals who have a personal stake in seeing a business proposition succeed. They tend to focus their investments on areas in which they have a personal interest.
- Interest Public Offerings. Depending on the stage of development of your business, it may be possible to raise funds by offering shares of the business to the public.
- Corporate Venture Capital. This capital is provided by established companies in return for a stake in your business.
A decision to opt for equity financing over debt financing is largely a personal one and depends on the type of risk you would like to take. At R&F Commercial Debt and Equity, we work with creative and non-traditional business financing. In contrast to debt financing where the terms may be variable but still fairly simple, equity financing may be quite complex. We are experienced and skilled at developing the perfect funding dynamic for all involved. With offices in Florida and Washington DC, we have connections in many critical markets. Contact us for a consultation.