If you are unable to finance your dream venture, we are here with the best equity financing ideas for you. These equity financing ideas will not only help your start your venture but also will help you meet all your venture requirements and keep you away from the despair of debt.
Most new ventures rely on debt financing to start their businesses and the main debt financing option they rely on include, credit cards, bank loans, and nontraditional money lending tools. Some business owners turn towards organizations and individuals who specialize in debt financing.
Before hopping into the deeper insights of equity financing, let’s get the basic idea of what equity financing actually is?
What Is Equity Financing?
Equity financing is the method of collecting funds from the investors to finance a particular venture. To get the required fund, the business owners have to offer a proportion of their company (referred to as shares) to the lenders.
Relying on equity financing, a business owner actually sells a proportion of their ownership interest in their company to the lender.
Compared with debt financing, equity financing is considered by very few business owners. However, it is the best way to raise money.
How To Collect Funds Using Equity Financing?
To kick start your new venture or to grow your existing ones, here are the 3 best equity financing ideas for you.
Number One: Go Public
The first way you can generate funds for your business is by making an initial public offering. It can be done by offering your shares for the public to buy in public-traded markets. After going public, your company will be termed as a publicly-traded company.
However, going public is not easy for every small venture. The companies that are eyeing going public have to be registered and approved by the SEC. The business owners have to design an offering in compliance with the guidelines provided by the Securities and Exchange Commission.
Once your IPO (initial Public Offering) gets approved by the SEC, the commission will then provide you a listing date when your shares will be ready to be traded in the stock market.
While your shares are getting ready to be traded, you will be required to start working on attracting investors to purchase your shares. This can be done by running campaigns and by publishing and distributing your prospectuses.
Number Two: Count On The Small Business Investors
Small Business Investor Companies is a licensed program that provides venture capital financing to small businesses. This program is licensed and regulated by Small Business Administration.
How this equity financing idea works is, venture capital firms gather investors to invest in ventures that are highly risky. It mainly pools investors like private investment companies, wealthy individuals, and private pension funds.
The number of firms and projects competing to collect funds is not specified thus, venture capital financing is a competitive method for equity financing.
The underwriting requirements are also quite lenient as compared to the IPO, thus many business owners rely on this type of equity funding to fund their ventures.
Number Three: Mezzanine Financing
Mezzanine Financing is another popular type of equity financing that most business owners rely on to fund their venture. This type of equity financing is a combined form of equity and debt financing.
This equity financing type is given the name ‘Mezzanine’ following the high interest of intermediate-sized businesses in it.
Following this financing tactic, the business owner borrows money from lenders with some predefined requirements. The lender may ask the borrower to meet the terms like, high operating cash flows, high shareholder equity, and the lending company may also assess the borrower’s capacity to pay back the loan.
The notable benefits of these sorts of equity finance loans are, the borrower can get more value than he could get from a traditional lender. This hybrid of debt and equity financing is considered as equity by the accountants.
Another benefit of this equity financing type is, it offers a lower debt-to-equity ratio to the borrowers, which proves to be an attractive point for the investors. So, Mezzanine Financing can help you attract an additional number of investors alongside a considerable funding amount.
Number Three: Angel Investors - Another Great Option
As the name signifies, Angel Investors are investors having a considerable amount of money to finance new startups. They offer funding to the ventures with an aim to get a higher return on their investments.
These investors do not only provide equity financing but also provide technical and operational knowledge to the newbie ventures. Following the initial funding, these investors may also provide a second round of funding to help the company prosper.
In return for all their funding and support, the angel investors will become shareholders of ventures that acquired the equity financing.
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The Bottom Line
Alongside the above-mentioned equity financing ideas, there are several other financing options you can count on. However, while deciding on any option, it is essential to compare with the pros and cons of its alternate options, only then can you help your business prosper.
