Equity Financing tends to be one of the primitive choices for raising finance for the company, because of the remarkable advantages it has to offer to companies, as well as business owners.
Equity Financing can be described as a way of raising funds by the company in exchange of a given percentage of ownership in the company.
Equity Financing tends to be a top choice for a lot of entrepreneurs because of the reason that the amount that is raised from equity finance does not have to be repaid, and this is a clear edge over other sources of financing which require a concurrent finance charge, as well as require the principal to be repaid at the end of the given period.
However, within the realm of equity financing, there are several options that entrepreneurs have that can help them make the decision based on the given facts and figures.
As a matter of fact, it can be seen that these options depend from situation to situation, as well as the personal preference of the business owners.
Below is a list of all the relevant equity finance strategies that can be used for the company.
Types of Equity Finance for Companies
There are different types of equity financing, which are given below:
- Business Angels Investors: Business Angels can be defined as individuals who invest in business in return of a share in the business. They are mostly seasoned entrepreneurs who have resources to invest in other business in exchange of equity.
- Venture Capitals: Venture Capital is also referred to as a private equity finance. Venture Capitalists look to invest considerably larger sums of money in exchange of equity. It also often includes pooled resources of various different investors, in exchange for a certain ownership in the desired company.
- Crowdfunding: Crowdfunding comprises of a huge pool of people investing, lending or contributing or lending amounts, in relatively smaller amounts in the business idea. This money is also combined to help reach the ultimate funding goal. Eventually these investors get a certain return as a result of their investment once the idea flourishes.
- Enterprise Investment Scheme: Enterprise Investment Scheme are schemes that are launched by the governments and public institutions in order to promote businesses. This helps businesses to gather investment, with the help of public institutions. However, the caveat here is the fact that they are not readily available, and in most cases, there is a stringent screening process. Therefore, all businesses might not have this option at hand when it comes to investment related decisions.
- Stock Exchange: This is perhaps the most popular source of equity finance that is widely used by companies. This requires companies to have an initial public offering, and an underwriting, after which they are allowed to sell shares to the general public. This option is only available to companies that have a certain threshold when it comes to their size, revenue and profitability. Additionally, listing the company on the stock exchange is quite an expensive process. Therefore, this option might not always be available to small and medium sized enterprises.
- Alternative Sources of Equity Finance: There are certain private companies, and financial institutions that invest in the company in exchange for ownership in the company. This might also include banks who have equity investment in their portfolio design. This option is quite expensive, since it is a big shot, and private institutions are quite selective about their investments.
How to choose the best equity option for the company?
Given the variety of equity financing options that businesses usually have, it can be seen that not all options are available to all the businesses.
This is predominantly because of the reason that there are numerous factors that need to be considered including the current size and operations of the company, in addition to the overall finance that needs to be raised, based on which this decision is taken.
It also depends on the personal preference of the business owner, because in certain cases, business owners prefer retaining their majority holding in the company.
Therefore, there are numerous options that businesses have to choose from once they have decided to raise finances through equity financing.
However, this decision must be taken keeping in mind the long term aim of the business owner, and how they want to take it in the near future.
Therefore, the type of equity financing is highly contingent on the size of the company which is looking to raise investment.