If you are interested in starting or growing your small business, you are going to need some type of funding. If you are not independently wealthy or you don’t have savings to lean on, you will need to seek outside funding. There are two types of financing: debt and equity.
In this article, we’ll explore equity financing and how to determine if it is right for your business.
What is Equity Financing?
Equity financing is when you sell a stake in the company to investors who want to share in your future profits. There are several ways to obtain this type of financing, such as through a venture capital firm or with equity crowdfunding.
If you choose to utilize this type of funding, you are not stuck making payments on a loan and you don’t have to deal with high-interest rates. Instead, investors become partial owners who are entitled to a portion of the profits and possibly a voting stake in business decisions depending on the terms of the sale.
Common Types of Equity Financing
The most common types of equity financing include:
Angel investors: wealthy individuals that give a small business a cash infusion in exchange for equity in the company or convertible debt.
Venture capitalists: individual or group that invests in a high-risk startup. In most cases, the growth potential of the startup offsets the risk. Ultimately, the VC may want to buy the company or a substantial portion of its shares.
Equity crowdfunding: selling of small shares to a variety of investors through a crowdfunding platform. This type of funding typically requires extensive groundwork and marketing to reach funding goals.
Advantages & Disadvantages of Equity Financing
Equity financing has advantages and disadvantages. Some of the advantages include:
- Ideal for startups in a industries with rapid growth potential
- Allows for rapid scaling
- No repayment required until company profits
On the other hand, the disadvantages include:
- Can be difficult to obtain
- Investors involved in business operations
Should You Seek Equity Financing?
Ultimately, the decision about whether or not to seek equity financing is a persona one and depends on the type of business you have and whether or not the advantages outweigh the disadvantages. If you are interested in learning more, contact Monterey Commercial Capital today.