Equity finance is increasing business share capital in return for sharing ownership and control of your business with interested investors. Equity financing enables the business to operate with enough capital and does not have to get additional debt from elsewhere. With equity financing, the investors can even provide additional funding if the need be, they want to see the business grow.
Why equity finance
When businesses fail or find it hard to obtain debt financin,g they can turn to non professional investors like friends and family for equity financing or it can get finance from venture capitalists.
There are two main sources of equity finance: venture capitalists or high net worth individuals also called business angels. These investors are paid in the form of dividend payments and dividends depend on whether the business is making a profit or growing.
How do investors help the business? Equity financing is specifically meant for your business to grow. Thus, investors depend on the performance of the business. The people who invest in the business will help the business grow by bringing in business contacts and skills. The experience which they might have will also help in coming up with business strategies. These investors also help with key decision making. This is because they have got a direct interest in the business, they want to see the business making profits and increasing in value.
Disadvantages of equity finance
Whilst this form of financing seems to be cheaper, it can place a lot of pressure on your business. Using equity finance has got its problems as well. Potential investors require a lot of previous information about your business before they can invest. They want to know about your previous business and management performance, sales figures for example. This can be time consuming and costly to your business.
Reduced control and ownership Once investors have got a share of your business, it means your decision making powers will be reduced and you will also have less ownership of the business. You are also bound by legal and regulatory investment issues during the process of raising your funds. It is therefore important to make sure that your business is profitable and that your management has got the necessary skills to grow your business.