Equity financing

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.

• It can be a more suitable option than debt financing if you have a poor credit history
• There’s no additional financial burden on your company as there are no monthly repayments
• Private investors can bring valuable skills, experience and contacts to your business
• Your investors will be motivated to make your business a success and will be more likely to provide follow-up funding

• Equity investors will own a portion of your business and in some cases may have a say in management decisions which can lead to conflict
• You may have to split the profits with your investors – although this may be worthwhile if you are benefiting from the experience and financial value they bring
• Raising the required funds can be time-consuming

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:

• Are you prepared to give up a share in your business and a level of control over management decisions?
• Does your team have the experience and knowledge to drive the business forward, or would you benefit from having access to business contacts and management expertise?
• Does your business have a poor credit history, making it harder to get a bank loan?

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.

If you’ve decided equity finance would suit your business, register with Swoop to speak abut how we can assist in match you with the most relevant equity finance for your business; our team are more than happy to offer you some free advice on your options.