You’ve got a God-given vision for a new business or for an existing business but you don’t have the funds? Welcome to the club! Not only do we need funds to get a business off the ground, but often new funds are needed simply to grow. An important piece of equipment breaks, but we don’t have the money. A new opportunity arises but we don’t have the cash to fund the campaign.
Whatever the need, the question is how are you going to fund it? Let’s explore the different options businesses have.
In part one of this three part series we will first look at equity financing.
Equity financing is where you receive ‘capital’ in exchange for part or full ownership of the company. That funding can include your own savings, and hence you are an owner of part or all of your business.
- No Repayments – unlike a loan, you never make any repayments. Instead the equity holders (shareholders) receive dividends or income from the business as a return on their capital. In addition they can sell their holding in the business to receive their capital back.
- Cheaper – the attraction of equity funding is that it there is no cost attached it. If you borrow money from a bank, not only do you return the capital, but you pay ‘interest’, whereas with equity funding there is no interest or repayments, there is however sharing in the profits.
- Loss of Control – if you get capital from third parties then you may be losing control over your business depending on what percentage of the business you allow third parties to own.
- Giving away Profits – third party owners will benefit from all your hard work. They will be entitled to receive their share in the profits of the business.
It is often forgotten, but the stock market exists as an avenue for equity funding. Companies issue shares to raise money from third parties to fund their business. In return shareholders receive dividends and can also make capital gains if the value of the business appreciates.
Types of Equity Funding
- Your Own Savings – in many ways the best source of funding. Assuming the funding is 100% from you, then you have complete control and access to the profits.
- Family & Friends – generally I strongly recommend not seeking the involvement of money from friends and family, for the simple reason is that ‘what can go wrong, probably will’ and therefore it can have a dramatic impact on those relationships.
- Investors – third party investors who believe in your business can provide funding in return for access to profits. Depending on the size of their holding, some investors could end up with control of your company.
- Combination – a combination of any of the above three is possible.