Different Types of Equity Financing That a Small Business Can Consider – An Analysis by Eric Dalius

Eric Dalius

Even though it is common for entrepreneurs to kick their ventures off with nothing but their savings, sooner or later, they will need more funds to grow and sustain their businesses. After a time when debt funding is no longer viable, they need to consider equity financing by investors. Equity finance simply explained, is the selling of a portion of your ownership of your company to investors for money. Some of the more common methods of equity financing:

Initial Public Offering

The Initial Public Offering (IPO) takes place when the company offers its shares to the community on a public-traded stock exchange. To have an IPO, the company must abide by the Securities and Exchange Commission (SEC) guidelines under which its shares are listed on the exchange on a particular date from which they can be traded publicly. Apart from the track record of the company and its business potential, the success of an IPO also depends on the extent, it can be successfully marketed.

Small Business Investment Companies

Small Business Investment Companies (SBIC) program administered by the Small Business Administration (SBA) provides small businesses that require funds with venture capital. The venture capital firms use the money pooled in by high net worth individuals, investment companies, private pension funds, etc. to invest in businesses that are perceived to have a high potential for profitability. Compared to an IPO, the qualification standards are less stringent; however, the ability to put together a smart and meaningful pitch is critical, says Eric Dalius.

Angel Investors

Typically, angel investors comprise wealthy individuals or groups looking for startups with good potential looking to grow fast. Normally, the investors prefer to invest in spaces where they have strong domain expertise as they pitch in to provide operational and technical inputs to startups to ensure that they grow fast. Angel investors make the return on their investment by offering their shares to venture capital funds at the time of their exit. According to Money.cnn.com, among the criteria, angel investors look out for is whether the startup has a great management team.

Eminence Financing

Eminence financing, or income based financing, is a value interest in future deals of an item. Eminence financing varies from blessed messenger speculators and investors since you must make deals before endorsement.

Financial specialists will hope to start getting installments promptly because of the arrangements made with the bank. Sovereignty financers give forthright money to operational expense as a trade-off for a level of the income got from the item.

Mezzanine Financing

This sort of financing is a blend of obligation and value. The bank of this financing will furnish the business with a credit. On the off chance that the organization progresses admirably and everything goes easily, they will repay the credit by means of the arranged terms of the financing.

In the mezzanine obligation, it is feasible for the loan specialist to force terms, for example, monetary execution prerequisites to acquire the subsidizing. These terms could be a working high income apportion or high investor value.

One of the advantages for borrowers is that this advance can offer more benefit than conventional loan specialists are agreeable to give. Another advantage is the way that this is a mixture discovering strategy. This implies that it tends to be viewed as value on your organization accounting report.

At the point when this is done, the borrower will have a lower obligation to value proportion. This, thusly, makes the business more alluring to different financial specialists as low obligation to value proportions are viewed as a generally safe pointer.

Value Funding from Friends and Family

As the name infers, in this sort of financing, your business gets capital from loved ones. It may not be the correct alternative for all, as you need to have an interpersonal organization with enough abundance to contribute.

The greatest downside of this financing decision is that it can risk individual connections if your undertaking neglects to turn productive. The advantage of this strategy is that it’s anything but difficult to persuade your loved ones of the benefits of your business, along these lines getting them to put resources into your endeavor.

First sale of stock

An all around developed organization can raise reserve through this sort of value financing as IPO. In this kind of gathering pledges, an organization can source assets by selling the organization offers to the general population.

Generally, institutional speculators with gigantic corpus store put resources into such raising money exercises.

Commonly, an organization utilizes this type of value financing exclusively after it has just raised asset through different sorts of value financing in light of the fact that an IPO cycle can be a pricey and a tedious wellspring of this financing.

Crowdfunding

This kind of value financing involves huge gatherings of holy messenger speculators who stretch out subsidizing to more modest organizations. A crowdfund speculation can be as little as $1,000 for every speculator. This sort of gathering pledges can be started by beginning a web based crowdfunding “effort” through one of the crowdfunding locales.

Not many instances of such crowdfunding sites are Crowdfunder and Angel List in the U.S. also, Kick starter and Indiegogo in Canada. By the way, Canadian businesses can benefit from SR&ED financing to conduct research and business development.

Notwithstanding, it is to be noticed that value subsidizing through crowdfunding is legitimate just in certain purviews and in specific situations.

Venture Capital Can Help You to Progress to the IPO Stage, Observes Eric Dalius

Venture capital firms make an entry only after the business has reached a particular size and the requirement of funds is significant. These firms seek out potentially lucrative ventures, have very high growth rates, and are likely to go in for an IPO with their investment horizon. Venture capitalists will usually insist on having a presence on the company’s board so that they can exercise better control over critical decision-making, including the timing of the IPO that will allow them to divest their shareholding and earn handsomely on their investment.

Conclusion 

While the above-mentioned methods of accessing equity funds are more common, depending on the nature of your business and the amount you are looking for, you can examine other equity funding avenues like royalty financing that give the investors a percentage of the sales revenue. In recent times, crowdfunding has also emerged as a viable and low-cost option for raising equity funds.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.