All about equity financing

When you decide to start a small business, one of the questions that is likely to arise is how to raise money to finance your business operations. It can not be stressed enough that no matter how you plan to obtain financing for your business, you need to spend some time developing a business plan. It is only then should you go forward with financing plans, for even a simple small business.

After your business plan has been completely written out, you may want to consider equity financing. Most business owners have put cash, into the business, so that will be your initial base. Then you also may have family or friends, who are interested in your business idea, and they would like to invest in your business. That may sound good on the surface to you, but even if this is the best arrangement for you, there are certain factors, you must consider before decide. If you decide to accept investments from family and friends, you will be using a form of financing called equity financing.

One of the most important things that you want to be clear about is, whether your family and friends want to invest in your business, or loan you some money for your business. That is definitely two different distinctions! If they want to invest, then they are offering you equity financing. If they want to loan you money for your business, then that is actually considered debt financing. If you decide to use equity financing, for your small business, there are certain advantages and disadvantages that you should be aware of. Some of these are-

• Your cash is freed up-You can use your cash and that of your investors, when you start up your business, for all the start-up costs, instead of making large loan payments to banks, or other organizations or individuals. You can get your small business, up and running, without the burden of debt.


• You can have reduced liabilities-If you have prepared a prospectus for your investors, and explained to them that their money is at risk, in your brand new start-up business, they will understand that if your business fails, they will not get their money back. Debt financing will have to be repaid, regardless of how your business does.


• You can have investors who can make positive contributions-Depending on who your investors are they may offer valuable business assistance that you may not have. This can be important, especially in the early days of a new firm. You may want to consider angel investors or venture capital funding. Just be sure to choose your investors wisely.


• It is also important to realize that there are significant disadvantages to equity financing. Some of these are-


• Your investors have some control-You will need to remember that your investors will actually own a piece of your business. How large that piece is depends on how much money they invest. You probably will not want to give up total control of your business, so you have to be aware of that when you agree to take on investors. Your investors will expect a share of the profits where, if you obtain debt financing, banks or individuals only expect their loans repaid.


• You will have to act in your investors best interest-Since your investors own a piece of your business, you will be expected to act in their best interests as well as your own. If you fail to do this you could open yourself up to a lawsuit.


• There can be a lot of paperwork-To maintain the proper legalities and all the record keeping, you can find yourself inundated with paperwork.