In the United States, the average small business carries about $195,000 in debt.
For emerging companies and startups, this number might seem extremely daunting. How can I set my business up properly if I know I’ll be swimming in debt?
This is where equity financing comes in. By selling shares of your business to outside investors, you can gain capital without having to immediately start repaying debt.
But for those that might’ve taken up equity financing in the past, how can they improve their strategy? What should they know when they reach out to an investor?
That’s what we’ll be looking at in this article today, as we’ll outline the benefits of equity financing and how businesses can improve their strategies to gain more funds.
What is Equity Financing?
Equity financing is the process of raising funds by selling shares (equity) of a company in exchange for capital. This means someone is putting money into your business while expecting a percentage of ownership in return.
Private equity financing is a popular way for startups and entrepreneurs to gain growth capital without accruing debt.
Debt vs Equity Financing
Debt and equity financing are both used by startups during the early stages of a business. However, the two are relatively distinct in how they deal with trading for resources.
Debt financing means a company is borrowing money from an outside source. This means the borrower will pay that money back, usually with interest, by a specific date.
Equity financing, as we established, involves selling shares of a business or company in exchange for capital. Whether a business owner chooses to finance their business using debt or equity depends on their specific needs.
If a startup needs money fast, financing through debt will probably be the most attractive option. Companies that are okay with giving away partial ownership to outside sources might go with equity financing.
Advantages of Equity Financing
One of the biggest advantages to equity financing, especially as it relates to debt financing, is the lack of repayments due to the owner.
Because the other party is being repaid through the future profits of your company, you don’t have to worry about repayment dates or interest rates looming over your head.
There’s also a chance you’ll receive more money through equity financing than if you were to finance through debt. Angel investors will likely give startups more than enough capital for businesses to ensure quality products.
Obtaining Equity Financing
For obtaining equity finances, you’ll likely turn to one of these sources:
- Angel investors
- Venture capitalists
- Family and friends
- Small business investment companies
For venture capitalists or investment companies, you’ll likely have to present a solid business plan to convince them that they can get a sizable return by putting money in your business.
With family, friends, or crowdfunding, you’ll likely have to put up a similar case, but perhaps one that’s not so technical.
Improving Equity Financing
Improving your equity financing strategies will depend on who you’re trying to get funding from.
For angel investors, venture capitalists, and small business investment companies, you need to make an objective case for why they can expect returns from your company. Layout a business plan that lays out your strategy, team, and other information that can convince them that your business will be profitable.
If you’re looking for funding from friends, family, and crowdfunding, make sure you’re getting your name out there. A proper outreach strategy will reach more people and possibly gain more interested parties for your new business.
Leverage Equity Financing Today
Gathering funds for your company can be daunting, but equity financing can be a solution. Leverage this article to understand how it can benefit you, and make the right financial moves for your business today.
For more information on business finance and business consulting services, schedule a consultation today.