If your business needs money to grow, you’ve the option of selling a stake in exchange for investment. Equity finance investors will have a claim on your future earnings but, in contrast to a loan, you don’t pay any interest – nor do you have to repay capital.
Equity finance could suit your business if you have an expansion plan or project that lenders such as banks aren’t willing to support, or if you want to avoid loan payments.
Your journey from startup to successful business could involve multiple rounds of equity financing from different types of investors, e.g. business angels, venture capitalists and private equity funds. Equity finance has two obvious advantages for businesses:
Read about some popular types of equity finance below, but it’s best to register now for full access to all the options available to you.
Equity crowdfunding is a type of equity financing whereby people (‘the crowd’) invest in an early-stage unlisted company, in exchange for shares (equity) in that company. Ready to take on crowdfunding investors?
Equity finance is the method of raising fresh capital by selling shares of your company in return for a share in the ownership (equity) of the business and will share in the profits. The people who buy the shares then become your shareholders.
Equity financing can be a good option for new or small businesses that are finding it difficult to get a loan.
Equity financing works by selling a company’s stock in exchange for cash. The proportion of your company that is sold will depend on how much has been invested in the company and what the business is worth at the time of financing. As your business grows, so will the value of the investor’s stake in your company.
Businesses can choose multiple rounds of equity financing from different types of investors, such as business angels, crowdfunding, or venture capitalists (VCs).
Equity crowdfunding is a type of equity financing whereby people (‘the crowd’) invest in an early-stage unlisted company, in exchange for shares (equity) in that company. Individual investors thus become shareholders and stand to profit if the business does well – they might also lose some or all of their investment. Equity crowdfunding usually takes place over an online platform.
While equity financing requires you to sell a stake in your business in return for funds, debt financing involves borrowing money and repaying it with interest added, with the most common form being a loan.
Unlike equity, debt does not involve relinquishing any share in ownership or control of your business. However, equity financing is generally viewed as the less risky of the two as there is no obligation to pay back the money injected into your business, so there are no monthly repayments and the money invested can be put towards helping the business grow.
Businesses can benefit from both debt financing and equity financing, but businesses that require a large amount of money to grow and scale quickly will usually find equity financing more suitable, while those that need funds quickly to finance everyday expenses and operations may prefer debt financing.
Debt financing is usually (though not always) cheaper than equity financing because equity investors take on more risk and therefore demand higher returns. The interest you pay on debt financing is also tax deductible, whereas dividends paid to shareholders are not.
In addition, once the loan is fully repaid, your company will have no further obligation to the lender, making it a cheaper option than equity financing for profitable companies.
Convertible debt is where money is invested in a company in exchange for shares to be issued at a later date – often when the company has raised finance from other investors. In return for investing early, convertible equity investors are given a discount on the price of the shares issued to other investors.
Before deciding whether equity finance is right for your business, it’s worth asking yourself the following questions:
If you’re happy to give up a share of your company in return for investment in your business and you would benefit from expert knowledge and experience, equity finance could be right for you.
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