Any business can finance itself in two ways. These are equity financing and debt financing. Equity financing is where cash is paid into the business. This could either be the cash from the owner or by the investors.
The equity investment gets certified when the company issues shares. The number of shares that one gets is directly proportional to the money that the person invests.
The investor will put cash into the business and buy shares in the hope that the business will grow. This will let him enjoy the share of the profit. The investors earn dividends on the share and can also realize the profits by selling the shares.
Understand equity financing
Equity financing is where the capital raised for the business operation or for a startup by selling shares to the investors in return for the money that the investor has invested into the business.
The investor is entitled to profits in proportional to the number of shares that they hold. The equity investors do not get any monthly payments. Instead, the investors are paid through the revenue that the business earns and they eventually move out of the ownership.
What are the benefits of equity financing?
There are a number of benefits of getting finance through equity. The small businesses that have just started have a small cash flow and they need capital. When they opt for a debt finance method then the company would have to pay monthly repayments and this, in turn, impedes the cash flow.
When the business is financed through equity then the owner of the business is not compelled to any payments and they can use the capital to invest back into the business.
Also, the equity financing method does not require the business owner to provide any collateral or any personal guarantee. Instead, those investors who choose to do equity financing equally accept the risks as does the owner of the business.
In case the business fails then the investor will not get any money back from the owner.
The problem of getting equity financing
The problem with getting someone to finance your business through equity financing is that there is a lot of challenge to sell your business to someone.
Angel investors can offer higher financing but to pitch your business to them and making the investors invest in your business is the real challenge. The other method of getting investment for your business is debt financing.