5 Top Forms of Equity Finance for Your Small Business

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Capital is important no matter what size your business becomes. But when you’re just at the start of your journey, finding the right investment is not only crucial, it can also be very elusive.

Borrowing on cards, seeking loans from banks or taking funding from friends and family might seem like the most accessible sources of funding for some business owners, but they are not always the easiest to achieve or the most substantial. By trading a share of your business (equity) for the investment, you’re receiving an injection of funds and promising your lender a piece of your profits.

Equity Finance
Shutterstock Licensed Photo – By enciktepstudio

In this article we’re going to introduce 5 top equity finance options that all small business owners should consider if they mean to see significant growth in the near future.

1. Angel Investors

Angel investors are looking for a big reward on their investment. They want to be able to hand you a fixed amount of capital, for you to then generate a substantial profit not too far into the future. As you can imagine, this only suits enterprises with a cutting-edge solution that is set to make waves as soon as possible.

They don’t want to have to hold hands or offer flexible terms. This can be one of the hardest forms of investment to achieve, but the most beneficial if you can deliver an unignorable pitch. Angel investors are typically very wealthy individuals who don’t necessarily want to get involved in the running of companies, but simply seek to make sound investments in successful enterprise for a handsome return.

2. Mezzanine Financing

With this type of investment comes a certain condition: If the venture fails and you are unable to repay the loan, the lender has the right to take an agreed level of equity in your business.

This type of financing provides the lender with a large amount of assurance, but also allows the business owner the knowledge that they can keep full control of their business as long as it succeeds.

Mezzanine Financing can often prove a more flexible approach than typical debt finance (conventional loans). The repayment terms can be adapted to suit the businesses projected needs. This flexibility streams from the lenders confidence in the fact that business shares are used as collateral, ensuring a total loss is not on the cards.

It’s very common for this type of finance to be used as a “top-up” of funds. For example, a business that needs to run a $6m project could secure the majority of the fund with a $5m loan from a conventional lender like the bank, and then add to this fund with $1m worth of Mezzanine Financing.

3. The SBA

The Small Business Administration (SBA) is responsible for providing small business owners with regulatory guidance, information on the correct licenses, and even delivers a series of programs including Small Business Investment. All ambitious business owners are encouraged to apply so you should expect stellar competition, but it’s well worth at least looking into the possibilities.

4. Venture Capital Investment Firms

Venture Capital firms (VC’s) have been made famous in films and media for their status and history of momentous successes, (think Facebook and other tech giants). VC’s aim to “back” only the most prized horses because it’s essentially their job to minimize risk and produce a very attractive return on investment for their clients. It’s very common for such firms to seek a very sizable equity stake in your business as a means of ensuring they gain the maximum return possible.

One of the key advantages of VC investment is the injection of expertise that these firms can provide to accompany the funding. VC’s are usually filled with industry experts who possess a wealth of knowledge as well as valuable connections. It’s in their best interest for your business to succeed tremendously, so they’ll be keen to boost your progress with stellar expertise where it’s most needed. It’s common for such firms to help with anything from Human resource management to advanced financial planning.

5. Royalty Financing

This is a far less strict and demanding arrangement compared to VC or Angel investments. In Royalty finance, the lender will provide the cash you need and then expect you to pay a certain amount of royalties back when the sales start to roll in. The amount you pay back is directly determined by the success of your product or solution.

Royalty Finance offers a number of advantages to small enterprise. Compared to most forms of standard equity financing, this form of arrangement allows business owners to achieve a capital injection without giving up such a large piece of ownership. This means the founders of the company are able to maintain their influence on the company’s path and success.

That’s the list! We really hope some of these ideas have been helpful for you. Like with any other serious endeavor, finding the perfect form of investment for your business is all about planning and knowing what’s out there!