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5 Types Of Equity Financing For Small Business

5 Types of Equity Financing for Entrepreneurs

Running a small business and thinking about your next expansion move? Equity financing can be one of the most beneficial ways to obtain a large injection of capital without the need for loans from banks or other conventional lenders.

In equity finance, you sell a percentage of your business to an investor who in return provides the funds you need to get things going.

As you can imagine, this type of financing is best suited to businesses that demonstrate strong performance and have a wealth of potential just waiting to be jump-started. In this article, we’ll be looking at the five types of equity finance that are best suited to small businesses and we’ll give you a quick explanation of how each one works.

Have a read through and see if any of these finance methods sound applicable to your situation:

1. Venture Capital

Venture Capitalists make it their business to invest in any small enterprise that has the potential to thrive and disrupt the market. It’s common for venture capitalist (VC) firms to have more expertise in certain industries than others, but generally, their bottom line is always going to be about the return they can achieve in helping you grow rapidly.

As you might have already heard, VC’s are notoriously hard to impress. Your business needs to be in a position where its value looks set to soar, and investing in it would be a relatively low risk move. In most cases, they’ll need you to pitch your business and the plan you have to take your revenue and profits to a whole new level. Most VC’s look to back horses that are about to win the Kentucky Derby and they’re very used to saying “no” to the swarms of business owners that have failed to convince them.

2. Angel Investors

Angel investors are not as interested in getting involved in your business as VC’s usually are. Angels are usually wealthy individuals who want to invest large and receive a healthy profit in return. They don’t want to make any decisions, provide any contacts, or do any work. They want you to have a solid strategy for executing the growth all on your own.

This concept really suits business owners that want to keep full control of their business without interference from third parties. Have a real plan that you know you can handle on your own and just need the funding to get it done? An angel investor will leave you alone to get on with it 100% your way.    

3. Investment From the SBA

The Small Business Administration (SBA) issues guidance, contacts, and licenses for startups. Since 1958, the SBA has also regulated the Small Business Investment Company program to facilitate the flow of capital to American small businesses. All small business owners are welcome to apply for this program and those who are accepted will have the opportunity for investment through professionally managed funds, mentoring, and a host of further networking advantages. These opportunities attract a lot of attention so be prepared for stiff competition, but it’s worth a go if you believe your business is brimming with unique potential and you like the idea of drawing inspiration from other experts and entrepreneurs. 

4. Private Investment From Friends or Family

This is a very common method of equity finance, as it can be one of the most accessible if you have a close friend or family members who would be interested in doing business with you. A lot of business owners have friends or family who they would love to work with and borrow from, but there’s also a very good reason why so many entrepreneurs shy away from dealing with personal associates.

When you have a personal relationship with a lender (or in this case, a business partner), the risk stretches beyond money and your relationship is put at risk. Family and friends can tend to be more imposing on your plans depending on their personality, and your wider circle of relations can be impacted should things go wrong.   

5. Mezzanine Financing

Mezzanine financing combines both debt and equity financing. In this arrangement, your lender gives you the funds you need and in return, you promise them a percentage of your business should you default on the loan. If all goes to plan, you’ll be able to pay the loan back and keep full control of your business. If things go south, they’ll take an ownership of the business going forward.   

As you can imagine, this type of arrangement is very popular in situations where the lender sees your venture as high risk. It’s also a selling point for business owners. If you think an investor is unsure, you can offer them a mezzanine arrangement as a means of sweetening the deal.  

We hope this quick introduction of the most common equity finance methods for small businesses has helped! Looking for options is the first crucial step to finding an equity financing solution that suits you. With one of the above finance options, you can grow in a way that fits perfectly with your individual circumstances.

Author Bio

Sharon Pascoe has been a finance content writer for over 8 years and now writes for Finance and Lifestyle, the blog of First Quality Finance