For any small business, injections of capital can become a great necessity, especially when it comes to emergencies, growth or important purchases. When most business owners think of funding, the first methods that come to mind tend to be credit cards, loans or partner investments. But equity financing is an option that can be incredibly attractive for businesses that are set to see great progress in the near future.
In this article, we’re going to look at the 5 most common types of equity financing. Think your business could prosper with a substantial injection of funds? Have a read through these to see if any might be applicable to your needs:
- Investment From The SBA
The Small Business Administration (SBA) issues licenses and regulates a program called Small Business Investment Companies. You can apply to this program for funding if you’re just starting out or take a look if you plan to launch your own business in the near future.
The SBA is a great place to find helpful guidance and resources, as well as a means to link with investment opportunities. These programs are usually very competitive so if you decide to go for them, be prepared to pitch your venture plans like a pro.
- Venture Capital
This is one of the more widely known varieties of equity finance. Venture capitalists (VC’s) are in the business of investing in all types of businesses. Any business that can prove it’s potential to succeed will have a good chance at attracting interest from venture capitalist. You should expect the rate of returns demanded by these investors to be steep and strict.
The application process is also very thorough. These guys receive pitches almost constantly and it’s their job to minimize risk, so a lot of investments can involve placing a representative from the VC firm on your board.
- Angel Investors
Angel investors are most suited to businesses that are really thriving. Usually, an angel investor is a wealthy group or an individual that’s looking to make a large investment with the scope to deliver a very healthy return. This means they are very selective with who they back.
Angel investors want to “get in and out” as smoothly and successfully as possible. They are really only looking for businesses that are on the verge of disrupting an industry in a significant way, and commonly demand higher levels of equity in the deal to ensure they maximize their gains.
- Mezzanine Financing
This is a type of hybrid arrangement that combines both debt and equity. The lender provides you the funding you need in the form of a loan but with a special arrangement. If your business succeeds, you can pay back the loan as planned. If things don’t go so well, your lender will then be entitled to take a certain amount of equity in your business.
This type of arrangement is popular with many lenders because the promise of equity should things go wrong provides them with a layer of security. Most small start-up businesses do tend to fail relatively early in their lives, so this protection is a huge selling point for the deal. This is a very attractive option to businesses that have strong leadership and stellar performance levels, as the arrangement allows the business owner to keep ownership as long as the enterprise remains profitable.
- Private Investment From Friends Or Family
This is one of the most common methods of equity finance, but it can also be one of the most tricky. A lot of people will have friends or family that they trust enough to take investment from. You get the capital needed, they get a slice of your business.
But this tac-tic really comes down to availability. Do you really want to add that strain to your relationship? Do they have the funds you need? And how will doing business with this person impact your relations with others in your circle?
That’s out list! We hope this collection of popular equity finance methods has helped you! It’s all about doing what ticks the most boxes for your situation, so understanding all your options is half the battle!
About the Author:
Sharon Pascoe has been a finance content writer for over 8 years and now writes for Finance and Lifestyle, the blog of First Quality Finance
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