You can’t expect to keep your business afloat without financing. All businesses need money to facilitate their operations. Depending on the type of business you run, you may need to purchase supplies, equipment, insurance, advertising services and more. While you can always obtain a loan from a bank, another financing method to consider is equity financing. In this post, you’ll learn more about this alternative financing method and how it works.
What Is Equity Financing?
Equity financing is a fundraising process that involves the sale of equity to an investor or group of investors. Investors are different than lenders. Lenders offer loans that must be paid back — typically with interest. Investors, conversely, offer to purchase equity in a business. If you need additional money to keep your business afloat, you can reach out to an investor about the possibility of equity financing.
How It Works
Although it sounds complex, equity financing is quite simple. It revolves around the sale of stock shares to an investor or group of investors. As a business owner, you probably own most if not all equity in your business. Equity is reflected in stock shares. You can sell these stock shares to an investor. The investor will benefit from receiving equity in your business, whereas you’ll obtain capital that you can use to finance your business. That’s essentially how equity financing works. There’s no obligation to repay the money from equity financing; you just have to sell equity in your business.
Pros and Cons of Equity Financing
By using equity financing, you can obtain money very quickly. It’s typically faster than traditional financing methods, including loans. You can sell some of your business’s equity to an investor, and after the transaction has closed, you’ll have money to use for business-related purposes.
You don’t have to worry about credit problems with equity financing. Unlike with loans, equity financing doesn’t require good credit. Rather, you can use it as a financing solution for your business with bad credit or even no credit.
On the other hand, you’ll have to give up equity in your business to the investor or investors from which you can secure equity financing. Some business owners are unwilling to give up equity. They want to “own” all of their business, so they avoid equity financing.
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