It has been said that nearly 61% of businesses are launched with either private capital or capital that is invested into their business by family and friends but investment doesn’t have to stop with merely just your family and friends, which is why equity finance exists.
Equity finance is cash that is invested into your business in return for a share of your business. These investments of cash never have to be repaid and don’t have interest attached to them. Equity finance is true risk capital as there is no guarantee that the investor will get their money back at all and these investments are not tied to assets that can be removed from your business should it fail.
The way in which investors get a profit from their investment is the fact they have a share in your business. This share means that investors either get money that is generated either through a sale of the shares once the company has grown or through dividends, a discretionary payout to shareholders if the business does well.
There are several types of equity finance such as business angels and venture capitalists. Each type of equity finance varies in the amount of money that is available for investment and the process of completing the deal.
If your business can support a growth rate of a least 20% you are more likely to be able to get equity finance. If you can’t generate a growth rate of at least 20% in your business then you are unlikely to be able to gain equity finance. It is the idea of control and the prospect of higher returns if your business is successful that attracts people to invest in your business
Sadly however many people are still highly reluctant to seek the help of equity finance as they see the idea of it as ‘relinquishing control’ of their business. Many small businesses are especially reluctant if their business is growing fast. As a business owner you should ask yourself the following questions below making any decisions about choosing to use equity finance:
• Are you prepared to give up a share of your business as well as some of its control?
• Are you and your management team confident in the business and the products and services that are on offer?
• Does your business have a unique selling point?
• Do you have drive to grow your business?
• What industry experience and knowledge does your management team have?
You should also consider the following when it comes to obtaining equity finance:
• How much funding do you need?
• How much control are you hoping to retain?
• How long do you need your funds for?
Each business should investigate the options that are open to them when it comes to finance. Equity finance is medium to long term finance and is the perfect type of finance that is open to small businesses, especially if you are an entrepreneurial business. Entrepreneurial businesses are what private equity investors are mainly interested in. This is because they have aspirations and a high potential for growth.
If you are interested in the use of equity finance it is important that you speak to a financial team who can put you in touch with people who will be able to put you in touch with the right investors.
By: Helen Cox
Posts Tagged Assets
There are two main types of financing for a business, debt or equity financing. Debt financing tends to be the type of financing you receive from a traditional bank loan and equity financing tends to be financing you receive from venture capital into your business from outside investors. The benefit of debt financing is that it is finite and you will pay down the debt over time to a zero sum balance without any further obligation to the lender. The down stroke to debt financing is that traditional lenders will take a hard look at your business including how long it has been in existence, income from operation, expenses and will require hard assets for collateral for the loan. Additionally, lenders will most certainly want you (and any other principals of the organization) to personally guarantee repayments of the loan. Another disadvantage of debt financing is that your organization will be burdened with some other type of regular payment (usually a monthly payment) depending on the terms and conditions of the financing and this can absorb critical cash flow, especially with small business.
The benefit of equity financing or venture capital is that you will be receiving money in exchange for equity in your business in the form of stock or some other form of equity like percentage of income or gross/net sales. A primary benefit of this type of financing is that typically there is no monthly payment requirement to investors. Instead, you are giving up ownership interest, most often, permanently.
Traditional lenders, banks for example, will look at your business much differently than venture capitalist. Bankers want a zero-risk or near-zero risk position when they provide financing and will rely almost completely on the operating economics of the business with little regard for “potential future growth”. They want to see strong cash flow backed up by hard assets before they do a deal—the ingredients that most small business lack or they wouldn’t be seeking financing, right? Venture capitalist, on the other hand, tend to consider the management team and the potential future growth of the business more heavily than actual operating numbers, especially for small business with large potential but few sales and little or no operating history. Although these two lender types vary in their approach to analyzing a business for funding, you can be sure that careful scrutiny of you business will be conducted…
Besides the actual operating economics and pro forma analysis, both types of lenders will look closely at two particular documents: 1. Your business plan. 2. Your bank or loan request package. These two documents, if assembled correctly, can make the difference between success and failure when dealing with either lender type.
There are plenty of free SBA related materials that tell you how to create blue-chip, boiler plate business plans but they tend to be written for perfect businesses and not the average Joe who is less than picture perfect. If you are seeking some type of financing for your business I strongly suggest that you visit our site and check out our business e-books. We have several that cover a variety of topics and there are specifically two that will be a real treasure for you to own. One is called Power Planning (a powerful report on writing a wide variety of business plans) and How To Raise Money For You Business (teaches you how to assemble professional loan requests packages). They are priced at $5 each and can be worth millions in the hands of the right person. I am not trying to hype product, I am simply giving you a heads up.
The secrets to getting financing from either type of lender is a closely held secret by financial and business brokers for a number of reasons. Chief among them is it forces people like you to do business with them and they earn commissions. The SBA materials, while good, do not have the street savvy to get the job done in most cases. The proof is in the pudding—what has the SBA ever done for you? The SBA is just another government back bureaucratic nightmare for most. We also have some links for venture capital firms in our business links area located on our site on the Smart Link Zone page—it’s all-free.
Give it some thought…. Your future may depend on it.
To your success! Copyright © 2006 James W. Hart, IV All Rights reserved
By: Jim Hart
The ever increasing cost of living, higher prices on all of our necessities such as food and gas, is making it difficult for many people to keep their head above water financially. Everyone is trying to make necessary adjustments and adjusting their spending habits but sometimes it is just not enough. You still come up short. Debt consolidation has become the solution for many, and some homeowners have decided to take advantage of the equity in their home and obtain a home equity loan to consolidate their debt. All loans have their risks and benefits. A home equity loan is not the exception, but also carries a unique risk.
It is true that by consolidating with a home equity loan you can save a lot of money each month. Rather than having several payments you are reduced to one payment a month and generally at a much lower interest rate. Lending institutions flood people with propaganda advertising these advantages as the solution to all your financial problems.
One thing that the lenders fail to emphasize in their advertisements is that these home equity loans are secured by your house so by taking these loans you are putting your home on the line.
That means that you could be taking debt that at present is not secured by any assets, such as credit card debts or medical bills, and tying them into your home. Since this puts your home at risk this is a very serious decision that should be considered carefully.
A wise consumer considers things beyond what the lending institutions tell them. It is to your benefit to think about what could happen. For example, let’s consider what could happen if you are able to only pay off a portion of your debt with a home equity loan.
With credit card bills, medical bills, or other expenses, it can be difficult to pay and may have a higher interest rate. If you default on the payments it can have a negative affect on your credit. However, it does not put you at risk of loosing your home.
A home equity loan does not eliminate debt. It still has to be paid, just in a different form. There could still be months when your budget is tight and it could be difficult to make those payments. Now your home is at risk.
Consolidating your debt with a home equity loan can be very helpful. However, since a home equity loan involves putting a valuable asset, your home, at risk it should be considered very carefully.
By: W. M. Blake