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Equity finance involves investors investing a sum of money into your business in exchange for a share in your business’s equity. This money then provides you with capital to use for your business operations to stimulate growth. Investors will, in turn, receive a percentage of shares that give them a vested interest and say in your business.
Individuals may choose equity finance over other forms of financing (such as debt financing) as it provides your business with money without placing it in debt or putting its assets at risk.
Money raised through equity financing can be used for any business expense, activity or expansion. Raising capital might be for a specified purpose in your business plan and this can be included in your proposal to investors, but generally, there are no limitations or requirements in how this money is spent, apart from investors’ advice.
Depending on the investor (being an individual investor, an investment firm, an angel investor or a venture capital firm) there might be specific features or benefits that come with their investment in your business. Other than that, equity finance is quite straightforward, exchanging money for a share in your business.
Debt financing is when you take out a loan that will need to be paid back. Equity financing, in contrast, is where you get cash from an investor in exchange for a share in your business.
Some of the main differences between the two types of financing are:
What are the different sources of equity finance?
Sources of equity finance can be family and friends, business angels (wealthy individuals that invest their own money), venture capitalists (professional investors that invest funds in companies with high growth potential) or a public float (issuing securities to the public).
Are there any red tape or administrative difficulties involved?
There can be legal and regulatory requirements that have to be complied with when raising this type of finance, for example, when promoting investments. It is recommended that this be taken into account when considering your specific process of raising capital.
Is obtaining equity finance really that time-consuming and distracting?
Obtaining a loan is usually a quicker way to obtain finance, as it can take time to find the right investor. Raising this type of finance can also take management focus away from core business activities, and management time will have to be taken to provide investors with regular business updates.
The biggest amount of time will probably go into becoming investment ready, that is, preparing the right proposals and gathering all the relevant information for your pitch to investors.
Image: Shutterstock
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