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WHAT IS EQUITY FINANCING

Companies sometimes need money to cater for their daily operations or even finance their earlier loans. The easy way for them to get money is through the selling of their shares. When a company issues a share to an investor, they exchange part of the company's ownership with cash. This type of financing is known as equity financing.

Many companies opt for equity financing because the terms are quite favorable than bank loans or debt financing. There are many sources of equity financing such as friends, Initial Public Offering (IPO), or from a venture capitalist. As a company grows, it attracts a lot of investors at different stages of its evolution. If you want your startup to succeed easily, it is time you thought about equity financing.

How Equity Financing Works

As a company grows, there is a moment where a company does not have enough revenues, assets, or cash flows to act as collateral. This calls for equity financing, where the owner will have to exchange diluted ownership of the company for cash. The investor of the company by buying shares in that company, he or she commits himself to take risks along with the entrepreneur.

Similarly, when a well-established company needs growth and expansion, it will decide to sell some of its stocks to venture capitalists or angel capitalist through Initial Public offering in capital markets to gain that extra capital of expansion.

For the entrepreneurs, equity finance gives the needed capital to grow their business by giving up a portion of ownership and control of the business. As for the investors, they find equity financing a significant way to earn some interests when the company becomes profitable.

Types of Equity Financing

Typically, an entrepreneur will decide to use inheritance-gleaned funds, sales of personal assets as well as saving as equity financing. However, as a business expands, there is a need for large amounts of money to advertise, acquire advanced technology, or hire the right experts for the work. Therefore one will need to look for more promising external sources. Some of these external sources of equity financing are:

Venture capitalists

These are professional investors that are only interested in investments that will yield them huge returns. Typically, venture capitalists are interested in taking management role which gives them the chance to transform a privately owned company to a public limited company to sell their securities in initial public offerwhere they gain huge profits in return. They only invest more than $1 Million to selective businesses that have well management systems.

Angel Investors

This equity financing includes family members and close friends who are ready and willing to finance your business.

Initial Public offering

This is a decision opted by a well-matured business to finance its equity through the selling of shares to the public. Any member of the public can buy these shares in exchange for business ownership.

Crowd funding

This comprises of a group of family members or close friends who come together to support one another. Their financing is always below $1 million.

Conclusion

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