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 start-up 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.
Investors with capital, contacts and knowledge
No collateral, repayments or interest
Personal relationships with business angels
Access to investors’ expertise, skills and contacts
Investment incentives for seed-stage businesses
50% tax break for individual investors who share your risk
Investors must hold shares for a minimum of three years
Up to £150,000 in SEIS funding over the lifetime of your business
Investment incentives for growing businesses
30% tax break for individual investors who share your risk
Investors must hold shares for a minimum of three years
IUp to £12m in EIS funding over the lifetime of your business
Tax-efficient investment for high-growth businesses
No income tax on share dividends
No capital gains tax on share growth
Income tax relief on the initial investment
Fast fundraising via the crowd
Potential to reach a large audience and build a loyal following
Tax incentives for investors via EIS and SEIS
No up front fees
Smart money for high-growth businesses
Expertise, guidance and industry connections
Help with follow-on funding
Expectation of high returns
Patient capital with connections
Investment from generational wealth
Mentoring and customer introductions
A longer-term alternative to venture capital
Equity investment from foreign investors
Minimum £2m investment
Potential for exposure to new (non-EEA) markets
Longer-term investment horizon
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 finance 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).
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.
The Midlands Engine Equity Fund (MEIF) provides commercially focused finance through small business loans, debt finance, proof of concept and equity finance funds. It’s a collaboration between the British Business Bank and 10 Local Enterprise Partnerships (LEPs) in the West Midlands and South East Midlands.
The MEIF provides over £250 million of investment to support small and medium business (SME) growth in the Midlands and is part of the government’s aim to boost the region’s economy and support the growth of smaller businesses between 2017 and 2022.
Businesses will generally attract a different form of investor at the various stages of their evolution in order to meet financing needs. We’ve outlined the main options below:
Family and Friends: As the name suggests, a friends and family round is an investment round wherein the funds are provided by friends and family of the founders. The source of funds come from people you already know and most importantly trust you.
Business angels: Business angels or angel investors are private individuals who are prepared to invest their own money into start-up or early-stage businesses in return for a share of the company’s equity.
Seed Enterprise Investment Scheme (SEIS): A government scheme that focuses on gaining funding for small, new businesses and provides tax advantages to those who invest.
Enterprise Investment Scheme (EIS): A government scheme that seeks to provide funding for small businesses and young companies to assist with their growth by offering tax reliefs to individual investors who buy new shares in the company.
Equity crowdfunding: Where funds are raised from a large number of people – ‘the crowd’.
Venture capital: Venture capital funds look to invest larger sums of money than business angels in return for an equity stake in start-ups and early-stage businesses. It is most suited to high-growth businesses with long-term growth potential.
Venture Capital Trusts (VCTs): These are listed companies approved by HMRC to invest in or lend money to unlisted companies.
Private equity: Suitable for established private businesses. Private equity funds give your business money in return for a large share in your business.
Initial public offering (IPO): An IPO marks the first time a company sells shares to the public and is also known as floating or listing on the public markets.
You might also want to consider family offices.
If your business is just starting out, the most likely route to equity financing is through angel investment and those investing through the government’s SEIS.
As your business becomes more established, you may find interest in EIS investors, venture funds, or family offices.
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.
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.
Rachel has been writing about finance and consumer affairs for over a decade, helping people to get to grips with their finances and cut through the jargon. She’s written for a range of websites and national newspapers including MoneySuperMarket, Money to the Masses, Forbes UK, and Mail on Sunday. Rachel has covered almost every financial topic, from car insurance and credit cards, to business bank accounts and mortgages.
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