Considerations about equity financing
Most business owners find that at some point in the lifecycle of their business they need to seek out additional financing. Many business owners turn to considering debt financing when they need money and then quickly turn the other direction. Debt financing (especially when your business is in the early stages), can be a burden. When a business takes on a business loan they are taking on another obligation just like the other bills that they pay. In addition, it can be very difficult to secure a business loan in the current economic climate.Also business owners must consider that if they go out of business that loan must still be paid. This has caused many business owners to consider using equity financing.
Equity financing is defined as the issuing of ownership (usually through stock), in your business. This method can bring in substantial cash to your business and offers investors a healthy return all by selling shares of stock in your company. However, it should be stressed that this is a complex process with a lot of mitigating factors. There are things that you should seriously think about before committing to equity financing. Here are some considerations about equity financing-
- How long do you want the investment? The bottom line is that if you only need cash for the short term then this is probably not the right method for you. Keep in mind that most investors who are willing to invest will be looking for a medium to long term investment. This means that if you are just looking to improve your cash flow then you may need to go back to considering debt financing.
- How much control do you want to give up? Remember that if you take a business loan then the only thing you owe the bank is the money repaid. However, if you are going to use equity financing you are actually giving up some control in order to get the money that you need. Your investors won't just give you the money and hope for the best. They will have a voice and vested interest in how your business is doing and you will have to report to them.
- What is your long-term strategy for your business? The thing that you have to keep in the forefront of your mind is that your investors will be looking to get a return on the money they invest with you. You will have to have a plan that will make that happen. This means that you may be forced to consider selling your business to a larger firm, merging with another business, or offering a public stock offering, which would allow your investors to sell their stock on the open market. The bottom line is that if you are considering equity financing then you have to think long term.
- How much profit are you willing to give up? If you decide to use equity financing keep in mind that you will have to share whatever profits your company makes. Before accepting any equity financing agreements you should make sure that you run all of the numbers in order to make sure that you are not paying a larger amount of profits then you would pay on interest with a typical business loan.
- What is your personality type? The bottom line is that it takes a certain personality type to deal well with using equity financing. If you fear risk, have less tolerance for working with others and need to retain complete control of your business then using equity financing may not be right for you and your business. Many business owners report that the final decision to use equity financing over debt financing often rests with their personality and what they feel comfortable with.