Equity, Finance

What is Equity Finance and Should You Take Advantage?

Business Advice | 31 January 2023 | 1 year ago

There is no denying that starting a business is costly, and it’s unlikely that you will have enough money readily available to get started. Even if you already have a successful business, you might not have enough money to cover the cost of expanding it or starting a new project. For the majority of business owners and entrepreneurs, raising money is key. There are a number of ways to do this, and equity finance is one of them.

What is Equity Finance?

Equity finance is a way of raising money to start, develop or expand a business. Instead of borrowing money from a bank or investor, in the form of a loan, equity finance helps you to raise money by selling shares in your business. Though you will be giving up some ownership and control, you will receive capital to invest back into the business in return.

How Does Equity Finance Work?

Equity finance can be done by selling shares to existing shareholders or new inventors. For example, you might sell 10% of your business in return for a fixed fee. This money can then be put into the business and used in a number of ways – perhaps you are having a short term cash flow problem or you have a long term project to fund – whilst you retain a majority ownership.

Equity Finance vs. Debt Finance

The main benefit of equity finance is that the capital gained by selling shares does not have to be repaid. If the company fails or stops being profitable further down the line, there is no worry about having to pay back the money. This isn’t the case with a loan, which needs to be repaid regardless of how well the business does. Regardless of what happens, you will still need to repay every last penny of a loan. However, it’s important to remember that this works both ways. If the business does become successful, a percentage of the profits will need to be given to shareholders.

Is it Right for Me and My Business?

Equity finance does not need to be paid back, but it does require you to give up some control of your business. It’s also likely that you will need to reach certain targets and stick to a timetable, in line with what stakeholders want. Nevertheless, it can be used to raise significant amounts of money quickly, as well as helping to boost long term investments.

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