Equity financing is a useful tool that can you can use to help grow your business. In this type of financing, you would sell shares of your company to raise money for it. You may choose to sell these shares to your friends and family, to investors, or to sell them in an IPO, or initial public offering. It may also be helpful to consult with an accounting firm like Brown Smith Wallace LLP prior to doing equity financing.
This type of financing is different than debt financing, which is when a company sells bills, bonds, or notes to investors to gain capital. Unlike debt financing, equity financing places no holds or restrictions on the company’s activities. There is also no obligation to pay back the money that you have earned through equity financing either. In debt financing, you must pay back the money that you’ve earned over time with interest.
In this article, I’ll be going over 8 ways equity financing can grow your business, and hopefully, by the end of this article, you’ll have the information necessary to decide whether or not equity financing is the right move for you and you company.
- It Can Get Your Startup off the Ground
Equity financing is a great tool to use if you are a startup company that does not have a lot of capital yet. Every business owner knows that you need to spend money to make money, but in order to do that, you must first come up with money to spend. This is where equity financing comes into play.
By selling some shares of your company, you can raise enough money to get your startup company off the ground and running. You can raise money quickly to put into your startup so that you can begin to grow the business. Every single startup needs investors in order for it to become a successful business, and equity financing allows you to go through people like friends, family, business contacts, and in some cases, angel investors or venture capitalists rather than going through the big shot Wall Street investors.
In fact, in nearly every single case out there, startups will not be able to go through an IPO or use debt financing since they are still up and coming. It is nearly impossible for a startup company to grow and become a successful business without the use of equity financing.
- It Can Fulfill Short Term Funding Needs
If your business runs into money trouble and needs some short term funding, equity financing is a great solution to help your business raise some funds quickly. It allows you to make money right away without having to pay interest on it since you only need it short term. You can ask a friend or family member if they would be willing to invest in your company to help you solve this short term funding need or you can find an investor through investment network.
Both of these methods are fairly quick and easy. It is certainly much easier to obtain equity financing than it is to obtain debt financing due its strict lending requirements.
- It Can Help You Finance a Long Term Growth Plan
Let’s say that in order for your business to grow to its full potential, you need to devise a long term growth plan for it. This growth plan may include things like hiring new teams of employees, expanding the locations of your business, or investing in your business’s product. No matter what measures your business needs to take to put this growth plan into action, odds are it’s going to cost you some money.
Equity financing is a great way to finance this long term growth plan without restricting any of your company’s activities the way that debt financing does. In this type of financing, investors will usually invest quite a large bit of money, so you can budget that out to cover all of the different costs that will go into putting your growth plan into action. Many venture capitalists will invest as much as one million dollars into a business, meaning that you can take that large sum of money and spread it out to cover a variety of different things.
- Your Investors May Give You Valuable Advice for Your Business
If you do your equity financing through either an angel investor or venture capitalist, then your business may very well end up receiving some valuable advice from its investor. These types of investors have lots of experience and wisdom in their field that they can share with your business in order to help it grow. In most cases, these types of investors have either invested in business before that have become successful due to their investment or have started up their own successful business in the past. Either way, they can share some of this knowledge and wisdom with you to help your company succeed.
- You Can Potentially Gain a New Business Partner
One potential benefit of equity financing is the possibility of gaining a new business partner through your investor. If you and your equity shareholder happen to get along well and that shareholder takes enough interest in your business to want to be a bigger part of it, then you two could potentially become business partners.
This means that your business has the potential to gain the connections of your investor in addition to any advice or wisdom that they may pass on to you. Having a business partner rather than just an investor can bring a new perspective to the business as well which can aid in the growth of your business. Having multiple people’s perspectives rather than just one can help spark new ideas that you may not have come up with on your own.
As mentioned before, these investors are all usually pretty knowledgeable and experienced as well, so to gain one of them as a business partner can have a great positive effect on the growth of your business.
- Investors Can Help Spread the Word about Your Business
Once you do find someone to invest in your business as an equity shareholder, there is a chance that they can help spread the word about your business to their colleagues and connects. Whoever invests in you did so because they saw potential for growth in your business, so a lot of the times they are going to want to help your business grow and succeed. One great way they can do that is to help get your business’s name out there and link you with any connects they may have.
- You Won’t Have to Worry About Repayment or Interest
One huge benefit of choosing equity financing over debt financing is that you don’t necessarily have to pay back the money that you make from equity financing. You are not taking out a loan, so you will not have any interest that you need to pay on the money you make. This will help save your business from spending extra money on interest which can in turn, help it grow using that saved money.
- No Liability if Your Business Does Not Succeed
Let’s say that the worst case scenario happens and even after you’ve utilized equity financing, your business still does not succeed. It may seem like a huge loss, but there is one bright side to this unfortunate turn of events. With equity financing, you will not be held liable if your business does end up failing.
The investors who invested in your business are the ones who are going to be taking the hit. This means that you can get off nearly scot-free and potentially start up another business in the future. If you used debt financing to gain capital for your business only for it to not succeed, you would still be stuck paying back all of that money that was loaned to you plus interest, which could really put you and any of your family members who invested in your business under.
Conclusion
As you can see, there are a lot of great benefits that come with using equity financing to grow your business. If you have a startup, it is going to be nearly impossible to grow your business without the use of equity financing, but even if your business is not a startup, this type of financing can still be very useful and help you grow.
If you are contemplating whether or not equity financing is the right move for you and your business, take into consideration all of the ways listed above that it can help your business, but also remember that with equity financing, you will be giving up some of the ownership of your business. Depending on what type of agreement you and your investor made, they may get a say in some of the decision making that is done for your business as well. In some cases, your investor’s opinions may not align with yours, so it is important to choose an equity shareholder that you feel is a good fit for you and your business.
Equity financing gives your business the potential to grow in so many different ways, but weighing your options and finding the right person to invest is definitely very important.
