How Equity Financing Will Turn The Wheel Of Your Business Interests

This involves raising capital by selling an interest in your business to other interested investors.




In other words you surrender a percentage of your rights or control in the business depending on how much extra capital you need.

This option gives investors an opportunity to sharein your company’s profits through dividend payments or capital gains, as opposed to debt financiers who are limited to a guaranteed return by way of interest charges.

In many cases though, providers of equity financing may insist onsharing in the management and control of your business so as to safeguard their monetary interests.

Each of these financing options can work very effectively in different situations, but only you can decide which of “equity or debt” will work best for you.

You need to ask yourself a number of questions that will help you make the right choice.

For example, did you start your business so you could “do it your way?”
Or, so that you could leave a legacy of some kind? If so, you probably won’t be comfortable giving up even a modicum of control of your company.

That rules out equity financing and points you solidly in the direction of a bank loan or other form of debt financing.

On the other hand, do you simply want to make a bundle by growing your business – and then selling it and moving on?

In that case, equity financing may be exactly what you’re looking for and can provide two highly marketable benefits – an infusion of much needed cash, as well as specific expertise and management skills from the investors who will help run your company.

Their help could ramp up your business more quickly than if you were on your own – and make your company more attractive to potential buyers.

I’ll now do a very brief overview of the practical characteristics of equity financing – which you’ll recall entails giving up a portion of ownership interest in your business.

Selling stock or an ownership interest in a business is probably the best known and most common type of equity financing.

It generally requires compliance with federal and state securities laws, calls for the assistance of financial and legal professionals, and is usually quite an expensive process.

One common route to selling stock in a company is through an Initial Public Offering (IPO) i.e you put a specified number of shares on sale and invite members of the general public to buy an interest in your company.

The other option is called a Private Placement. This is similar to an IPO but is a less complex source of funding, because it allows you to privately pre-select the equity investors who will purchase your shares.

In both cases, stockholders may exercise control over your business in direct proportion to the number of shares they own.

In another source of equity funding, Private Investors called venture capital investors or “Angels” take an equity stake in your company.

While this type of arrangement may include loans you won’t have to repay, it’s certainly not a free ride. You’ll usually have to give up a significant portion of your equity, and investors usually insist on providing business direction as well as financing.

Key Financing Facts

Whether you decide to go with debt or equity financing – there’s a universal factor involved in being approved.

• You are unlikely to interest outside investors unless you can show a strong track record and a credible business plan.


• Investors — who purchase an equity stake in the business — will expect to be offered high potential returns to compensate for the risk they are taking on.


• If you use a broker to find private investors you should expect to pay $60 to $420 in fees plus a percentage of any money raised.


• Most venture capital companies will not invest less than $1 million because of the high cost of investigating investment opportunities. Hence the need to establish a presence in order to safe guard their interests.

Your business absolutely, positively must be perceived as a good risk by your potential source of funding. For that reason, you must be fully prepared for intense scrutiny of every aspect of your company.

Equity financing is a complicated and risky venture which requires professional input for proper risk assessment. I recommend that you consult your CPA first, or contact us, for online advise before making costly investment decisions.

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