Equity financing is a major way for businesspersons to raise money to fund their companies without obtaining debt. It may sound simple, but securing equity financing is a significant decision that affects your business in the short and long term.

Types of Equity Financing

Individual Private Investors

One way to raise your business funds is by reaching out to individual investors, including your family, friends, and colleagues. Most business owners consider it the most accessible type of equity financing since they work with individuals with whom they have had a prior relationship. Relying on individuals for your investment means that you will likely require many individual donors to make a serious impact while receiving fewer connections and guidance.

Angel Investors

Angel investors may either be a larger group or an individual entity and are capable of investing a large sum of money in a business they have experience working in. Apart from making a huge financial investment, angel investors provide valuable guidance to ensure the business’s success. Such investors get involved with the companies in their infancy stages and oversee their subsequent growth by applying themselves to growing your business through planning.

Venture Capital Firms

Venture capital firms are a group of investors who invest in businesses with the potential to overgrow and appear on the stock exchange in the future. They will invest a large sum of money in a business venture and receive a considerable stake in the company compared to angel investors.

Advantages of Equity Financing

It Is an Alternative Funding Source

The main pro of equity financing is that it provides companies with alternative funding sources to debt. Startups may fail to qualify for large bank loans but can acquire funding from venture capitalists and angel investors to cover costs. Equity financing is less risky than debt financing as the company is not required to pay back its shareholders. Investors tend to focus on the long-term goal without expecting a quick return on investment which allows the company to reinvest the funds to achieve the required growth.

Low Financial Risk to Business Owners

Equity financing is an excellent low-risk approach to securing finance for your startup. Investors trade a percentage of ownership and agree to take the risks of operating the business. Investors thus open themselves to gaining or losing money via your project and allow you to receive their investments without any debt.

Learn and Gain From Partners

With equity financing, you get to establish informal partnerships with more experienced and knowledgeable individuals. Some may be well connected, allowing your business to benefit from their network and knowledge.

Equity financing is a good fit for business owners requiring significant capital to grow or fund their startups. Hire a lawyer to draft various documents, review all contracts, and contact an expert from Freedom Capital Solutions to learn more about equity financing options.