Equity Finance for Small Businesses
What is Equity Finance?
Equity finance refers to the procedure of giving up a part of the ownership interest in the form of shares in return for cash. It is a very common method of raising capital for a company.
Equity financing involves many different levels to it depending on the size of the business. Small businesses can give up a percentage of their company for an amount of money whereas bigger companies resort to big initial public offerings (IPOs). This kind of financing is often associated with angel investors and venture capitalists.
What Are the Pros and Cons of Equity Finance?
Like every form of raising capital, equity finance has its pros and cons. There are certain risks and rewards associated with this type of funding and as a small business, you need to be aware of the implications. Let’s take a look at the pros and cons of equity finance.
Avoiding unnecessary costs
If you were to finance your business through traditional means such debt finance or a banking loan, there would be some costs associated with that. Servicing loans, interest rates and tight repayment deadlines would add pressure and a bigger bill for a company that’s already facing cash flow issues. Choosing the route of venture capital, allows you to reallocate resources for the betterment of your company and shred some of the stress involved in the early stages of starting a business.
Investors are invested
Investors are not merely investing their money in your company. Their interest is pure as they now own part of the company. If they want to see the company stock rise or even one day see the company listed in the stock market, they must invest time, effort and ideas.
Investors are well connected
You get the cash flow, you get the attention of the investor but most importantly you inherit their experience and contacts. Equity investors are usually people that can fast-track your business by introducing you to the right people, giving you a head start in the industry. These kind of advantages will not show on your profit & loss account or your balance sheet. They are intangibles that will only be seen in the growth of the company and the execution of your business plan.
Fund me once, fund me twice
Beginnings are always hard but once you have your foot through the door, it’s safe to assume that it will be easier to get more funding when you need it. Obviously, no investor will give up their cash if the company is not showing promise or potential. Pending that the first round of funding is yielding results that trend upwards, it should be fairly easy to secure further funding if needed.
It’s not easy
If it was easy, everyone would do it. The process of finding and convincing the right fund/investor is daunting to say the least. To find the time and employ the resources needed for equity funding, is an elaborate, time-consuming venture. Considering that small businesses need extra attention and are usually never adequately stuffed, undertaking the equity financing process is a challenge.
KYC & Compliance
Your product, services and ideas are not enough to impress to secure you the funding. Investors will need to take a deep dive into your books, finances and operations up from day 1 to the present day. Couple that with forecasts and projections about where the business is going and what you have is a detailed background check and screening of your company. Investors need to see a “healthy” business model and a company that has both the product and management to grow.
Equity finance is by definition a process that deducts part of your company stake and hands it over to the investor. But things don’t stop there when it comes to relinquishing power. As previously mentioned in the pros section, investors will want to get involved in the running of the company in some way, sort or fashion. Whether it’s an advisory capacity or a more actionable role, you need to be willing to involve them and onboard their input in a productive way.
Once you secure the funding, reporting becomes another part of the business you need to worry about. Investors are not auditors but they probably require even more analysis and clarity on how the business is doing than external parties would ever need. Regularly presenting them with information in an easy, meaningful manner becomes an essential undertaking.
Equity finance: Go for it or stay out?
The answer to this question can be found somewhere in between the points made earlier in this article. It all comes down to evaluating your business and management style and trying to answer a few questions.
How much do you believe in your business? If you see success around the corner maybe sharing equity is not such a great idea. Maybe a loan is the better choice.
Then you have management style decisions to make. How inclusive and collaborative are you when it comes to running the company? If you lack connections, experience and knowledge on the industry maybe an investor is the missing piece of the puzzle.