Equity financing is the process of raising money by selling the shares of the business. Companies increase capital money to fulfil their short-term needs like bill payments and other operating expenses. They might need funds to invest in their growth and long-term objectives. When a company sells its shares, it is effectively selling the ownership in return for money.
Often startup companies have a short-term need for cash to assist the business in some way. Investors earn profits by receiving dividends or when their share’s price increases.
A company may get several thousand dollars from friends, family members, investors or something called a large initial public offering (IPO). If the company decides to go public, the investors, also known as Venture Capitalists, can sell their stocks to institutional or retail investors at a premium. If the organization needs more capital, it can opt for the right offer or follow on IPO.
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Equity financing is a type of corporate financing that includes the activities and transactions related to raising funds to develop and acquire a business. Corporate finance associates like us help enterprises grow capital from public markets using initial public offerings, equity-linked securities, follow-on offerings, equity derivatives and share repurchases.
Corporate financing experts help businesses to deal with capital structuring, funding sources, and investment decisions. We provide strategic advice, including private equity fundraising, acquisitions, mergers, strategic alliance, joint venture advisory and trade exits.
How does equity financing work?
The term equity financing is mainly used to talk about public organizations listed on the stock exchange. Though, it can be used to describe private companies and how they raise money. A company that wants to grow but lacks funds, or has no revenue or additional cash, may want to approach investors to raise funds for its growth.
Equity financing incorporates the sale of common equity or stock. Investors are given a share of the company’s ownership in exchange for cash. That share depends on how much the company’s owner has invested in the company. At the time of financing, investors also check whether that investment is worth it.
Equity financing also involves the sale of other equity or quasi-capital instruments such as preferred stock, convertible preferred equity, and stock units involving common shares and warrants.
Ultimately, the final agreement depends on the company and investor. Smaller and private businesses typically have the written agreement. For larger and public companies, the contract can be more complicated.
How to obtain equity financing?
Corporate finance advisory helps manage the required funds & their resources, capital structure, and investment decision. Equity financing can be obtained by opting for private funding sources or offering public shares of the business. Private funding techniques are simpler as they don’t need many formalities like public offerings.
Private funding sources require that the company makes an agreement directly with the investor, whereas offering up public shares is an intricate legal process. In both cases, the business will have to create a business plan incorporating financial projections to make potential investors trust that its leaders have the expertise to grow and sustain the business.
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What are the advantages of equity financing?
With equity funds from investors, the company owner is relieved of the stress to meet the deadlines of fixed loan payments. However, business owners give up some control of their company and often have to discuss with the investors when making major decisions.
The key benefits of equity financing are-
No burden of debt: With equity financing, you don’t have to make repayments on investment. As the company doesn’t have to pay loan payment monthly, you are free from the burden of debt. This, in turn, gives business the freedom to get more money to grow your business.
No credit issues: If you have credit issues due to a lack of a financial track record or a poor credit history, equity financing can be the preferable or more suitable option than debt financing.
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Learn from partners: With equity financing, you will develop informal partnerships with more experienced, skilled and knowledgeable individuals. Some might have a strong business network that allows your business to benefit from it potentially.
Follow-up funding: Potential investors are often willing to get additional funding for your business, and they use their contacts. This way, follow-up funding helps businesses to grow.
Cash flow: Equity financing doesn’t take funds from the company itself. Repayments of debt loans take funds out of the firm’s cash flow that reduces the money and affects financial growth.
Long-term planning: Equity investors don’t expect to get a quick return on their investment. They have a long-term view when investing. They also realize the possibility of losing their money if the business does not work well.
What are the uses of equity financing for small businesses?
A small business that grows into a successful company will have numerous rounds of equity financing as it grows. As a startup typically invites different investors at various stages of its evolution, it might use different equity options for its financing needs.
See how equity financing can be used for small businesses-
- Initial Public Offering: An IPO happens when a company first goes public. A company will offer initial shares on publicly traded markets like stock exchanges. SEBI gives special relaxations to startups to list on the SME platform in terms of net worth profit and other requirements.
- Mezzanine Financing: This financing option is a mix of equity and debt. The lender of this financing will give a loan to the company. If the business does well, and everything goes smoothly, they will repay the loan through the negotiated terms of the financing.
- Angel Investors: An investor who has a lot of assets can provide finance for any small business. They are usually groups or wealthy people who want to get high returns on their investments. They will also be very strict while choosing the types of businesses they are going to invest in.
- Venture Capital: They are generally companies that provide funding to get shares or partial ownership of the business. They will generally want a seat in your company’s Board of Directors. However, they will not be using their personal funds to finance your company as angel investors do.
- Royalty Financing: These investors will also expect to get their return as soon as the contract results have been met. They will also provide upfront cash for the companies in return for their percentage of your profit.
If you have a fantastic business idea but don’t have enough capital to grow it, equity financing may be the perfect solution. You can benefit from our corporate finance associates to understand equity financing or finding investors for your business. Our advanced approach and expert knowledge relating to the facilitation of fundraising activities take your business to new heights. RNC works closely with you to understand your financial needs and business objectives and tailor recommendations accordingly.
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