In this post, we will talk about ‘The time’s Equity financing would fail you?‘ Previously we discussed HOW TO KNOW IF EQUITY FINANCING IS FOR YOU?
Equity financing is a method of raising funds or capital for your business where you lose a certain percentage of it in return for investment funds. It is a good financing method because the money realized is not expected to be repaid, unlike debt financing where both the interest and principal is expected to be repaid whether the company makes profits or not or else the company may be at risk of bankruptcy. Before this form of financing can be made possible, a business has to have good and convincing prospects, enough to attract investors; the owner of the business has to be willing to share the ownership of the business, be willing to share control, and consider the rights of other equity shareholders when making decisions. Nonetheless, there are disadvantages of equity financing which to some people might be advantages such as losing total control of your business, but you may enjoy the expertise of professional investors who may decide to aid the management of the company, etc. So, think carefully before deciding to use equity to source for funds.
There are also times when equity financing would fail you. They include the following:
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When you want a cheap and easy method of financing
When a business owner decides to source funds through equity, there are many expenses that will be incurred, and it is somewhat cumbersome. There are transaction costs, legal costs, costs of intermediaries, etc. So, if you decide that you want a cheap and easy source of finance, then this form of financing will fail you.
Your business has poor future business prospects
If investors are not convinced to invest their money in your business, then this method of financing will also fail you. A business with poor future prospects and an unconvincing business owner who cannot give solid reasons why investors should invest in the business is a lost cause. Nobody wants to invest in a bad business or company as people usually expect a certain percentage of return on their investment.
The size of the company is small
A small company and even some medium companies who might want to raise funds through equity will find it difficult because it is not a cheap source of finance. Equity financing will fail such companies. They are often advised to source funds through other methods.
There is a basic financial rule that the term of need should match the term of finance. Equity financing is a long-term source of finance. If you intend to finance a short-term project then this, again, might fail you. It’s better to look for other alternatives.
Control, Ownership, and privacy
If you are unwilling to share the ownership and control of your business, if you are also unwilling to share any form of information about your business to third parties other than the government, it just won’t work. Remember, some investors prefer to have a say in the management and control of companies they invest in so that they can monitor how it is run and also have peace of mind that they’ll enjoy a favorable return on their investments.