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 Venture Capitalists
When a venture capitalist takes the decision of investing in a small company, he or she does so after carefully studying the business plan for a period of up to 3 years. Generally the offers that enter this process are those that are different and innovative with a high potential for success. Venture capital funds follow a different set of rules than those established by banks. For instance, a venture capitalist will give great importance to the documents presented, the experience and profile of the entrepreneur, the idea of the business and the product it will offer to the market, and of course its innovative qualities.
Venture capital is obtained after going through a complex process. Depending on the kind of venture capital we are talking about, the investor may choose to buy shares (ordinary or preferred), or agree to receive advances on their bank accounts.
Venture capital is not intended to remain indefinitely invested in the company. Its intervention should be ad hoc and limited in time. The output can be achieved by: reduction or amortization of capital, the repurchase of securities by original partners at an agreed price, the resale of securities to a financial or industrial group, and by the sale at a capital development.
The capital gains that the venture capitalists obtain come essentially from the sale value of the shares they bought. The risks they take are: never being able to sell the shares, or losing everything if the company disappears.
You may be wondering, who are these investors? Well, venture capital can be given by angel investors, venture capital companies, or venture capital funds that help small business that have innovative or different ideas.
We present you here a list of factors that venture capitalists will take into account when choosing a company:
For investors what the company does and how it does it is important. They will want to know whether the business produces, creates, develops or recovers.
Status of the capital investment: public, semi public or private. The criteria for entry to the capital of a company can vary depending on the nature of the company that owns the fund.
Minimum and maximum amount granted: there is no need to contact a speaker funds from 1million Euros while your need for investment is estimated at 200,000.
The areas of funding are particularly important to venture capitalists because some may look for specific areas: technology, innovation, etc. As well, as if coverage is requested for a small or large geographic area.
By: Wade Henderson