How to know if equity financing is right for your business

If you are small business owner you may find a large part of your time, taken up with finding financing, for you business. Small businesses are especially needy when it comes to startup capital. The tradition path that is used by many small business owners is referred to as debt financing. This is when the company takes on financing in the form of a bank or private loan. However, many business owners understand the dangers of taking on to much debt, early in the business cycle and want to avoid it. Therefore they begin considering equity financing.

Equity financing is done by the issuing of stock (ownership), in your company. Using this option allows you to sell shares of your company to investors, injecting your business with cash and leaving the investor with the chance to make a high return. However, before you immediately move to this option, for financing there are certain things that you should consider.

• Think about how long you want the investment-If you are only seeking cash for the short term, offering equity is not the right approach. This is because investors will want their capital to help the company make good investments and position itself, for medium- and long-term growth. Because of this if your cash flow has not picked up as you expected, you may want to call a bank instead.


• Think about how much control/ownership of the business, you want to give up- Keep in mind that you'll have to cede some control over your company's operations if you offer stock to investors. Your investors won't simply give you the money and then walk away. You will have to offer ownership positions in order to get the cash you need.


• Think about what your long-term strategy is for your business-You will need to understand that shareholders will be looking for a plan to get a return on their investment. That plan could include:merging with another company, selling the company to a larger firm, or conducting a public stock offering which would then allow investors to sell their stock on the open market.


• Think about the profits- It is important to remember that, you'll also be sharing the profits. You need to make sure to run the calculations on any potential equity agreement. When you do this you may find that you're paying a larger percentage of your profits to investors than you would toward a bank loan.


• Think about your own personality-Some people have less tolerance, for risk and must be able to retain complete control of their operations. If you fall into this category then equity financing, may not be right for you, and your small business. Keep in mind that a decision to opt for equity financing over debt financing, is largely a personal one and in part determined by your appetite for risk.


• Before you make your decision, you must clearly examine all aspects of equity financing. There are several aspects that make equity financing, the right option. Here are just a few of them-


• Equity financing allows you to cut out the bank as a business partner-This means that instead of spending cash on loan repayments, you can use the money, from equity investors to grow your business. Conversely, equity investors help reduce your personal risk in the business. This is because you have managed to get working capital, from investors, you will not have to put your own money as such risk.


• Equity financing protects you-This is important because if your business fails, you would still be required to pay back any bank loans you take, or reorganize the debt payment under bankruptcy protection. You should understand that equity investors usually don't have the same rights as debtors. Because of this you would not be required to return their original investment in the event your business collapses.