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In this post, we will talk about ‘What is Equity Financing and How it Works’. One of the popular ways of raising finance for a business is Equity financing. For a business that wants to go really far, it has to make its shares public, seek investors, and finance its operations by way of Equity. Equity financing is simply the process of raising capital by selling the shares of an organization. Shares are issued out and set at a price. The investors or companies that buy shares are usually referred to as the owners of the business. They are also referred to as shareholders and stakeholders of the business. This kind of financing takes different forms depending on the type of company and the nature of shares that are being issued out. However, the two common kinds are common shareholders and preference shareholders. As a new business, there are, however, other ways to raise Equity. Generally, here are the
Various kinds of raising Equity financing.
One way small businesses raise Equity is to opt for venture capital funding. It is usually a risk on the part of an investor because he or she is investing in a business that is new or emerging. These private investors are regarded as venture capitalists and they provide start-up capital for the business.
The commonest method of Equity financing is the public issue of shares. A company gets listed on a stock exchange and calls for investments from a myriad of shareholders. Its stocks are traded there and it gets different individuals or companies added to its own pool.
Sometimes, people skip all the complex work and walk up to individual investors to pitch their services. In this case, investors get on board with the business and get a pre-determined amount of shares from it, without having to go through the challenges and complexities that are involved in publicly issuing shares.
This is simply a combination of debt and Equity financing where cash is given to an existing business or for corporate restructuring. It gives the investor the ability to swap from being a creditor to an Equity investor.
Friends and Family
Of course, friends are family are great at offering Equity financing. Friends could offer loans, but more often than not, close relationships usually lead to Equity. Friends and family are great because the riskiness involved are usually not fatal in nature.
Angel investors are literally angels that help you finance your business. These people are not angels in that they don’t want anything in return – they certainly do. They just come in handy when you really want to push your business. They are usually affluent individuals that provide capital in exchange for ownership Equity or sometimes debt.
All of these methods are ways Equity financing come. The goal is to help you finance the business without being necessarily tied to the obligation of repayment. Ensuring the growth of the business is the core essence of investors in this source of finance.