It has been observed that financing business start-ups is not so easy feat. If one can swing it, bootstrapping is the best option but no matter what, one will require small amount of money for turning idea into somewhat tangible. If funds are not rolling in yet, it’s hard to make a top notch product. That is the reason why many startups and small businesses provide equity to investors and employees. It might possible that even if investors from outside are not for you, but still you may be interested in providing equity to employees. But the question is, how will you do it? If you are running a smaller business and are thinking to offer equity then stick with all your financing options.
What Is Equity & Is It Right For You?
If you have a great idea for running a startup business but don’t have enough cash for funding your business then equity is the best solution for you. The main two common equity types are:
Equity Financing: In this, in order to finance your startup business, you need to sell shares to outside investors.
Equity Compensation: In this, one has to offer the percentage of company profits in exchange of less salary.
As it is said that private equity financing is not for all but it provides greeting option for debt financing to several business owners. In fact, private equity financing against debt financing cannot be charged with two major gripes business owners’ level due to risk with personally guaranteeing a loan and the constraint placed by it on available cash flow. Private equity eradicates the drawbacks of debt in that and for paying down debt, it does not divert capital from the business rather it shares risk in the business along with the entrepreneur. Another advantage of private equity is that you don’t need to pay right back to investors after they provide funding to your business. It means that one has more time for growing his business before he starts worrying about how he will how he will pay for it or not. And in case business fails totally, one doesn’t have to repay. It is fact that investors either swim or sink or alongside the business owners.
Moreover, private equity is actually an umbrella term for huge money raised directly from recognized institutions & individuals and pooled in a fund that mostly invests in certain range of business ventures. For considerable long-term gains, attraction is the potential. Generally the fund is placed as a limited partnership, with the investors as limited partners and a private equity firm as the general partner. Typically, private equity firms charge huge amount of money fees for taking part in partnership and be inclined to focus in a particular investment type.
Many entrepreneurs think that the best and common form of raising money for their startup is equity financing. It involves the usual pitching to venture capital firms and investors for raising money in exchange for equity in company. However, this is not the only way of raising money for company rather debt financing can help in other cases also. Another most common financing option for getting your startup off the ground is debt financing. It is when either you get loan from bank or private investors invest in your business startup which eventually you have to pay back. Each financing option has its advantages and disadvantages so better review them before taking any decisions for funding. Debt financing is money that has to be pay back and it can take the form of a line of credit, a merchant cash advance, a loan, or a credit card. Using loan for obtaining capital or growth funds for starting a business is referred as Debt financing. Debt financing allows businesses to get the money they require for their business without giving away equity. Provided businesses can continue with the payments of interest and pay off all they owe and will get to maintain all the remaining proceeds in the coming years.
Furthermore, if you have decided that equity is right option for you, then next step is to search for other investors such as family, friends, angel investors, business contacts, or venture capitalists. There are various networks that permit you to post your startup business plan and wait for outside investors to provide funding for your business. This system is great as it permits everyone to invest in your business startup and not only one main investor invests in your startup.
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