Equity finance is a way of raising capital from external investors in return for handing over a share of your business.
Sources of equity finance for smaller private businesses include:
- Venture capitalists - a type of private equity business.
- Business angels - private individuals with experience of being entrepreneurs themselves.
- Crowdfunding - a number of people each invest, lend or contribute small amounts of money to your business or idea.
- Stock market - selling a percentage of your business in the form of shares, which are subsequently traded on the stock market.
- Shares and shareholders - shares represent ownership of a company. Individuals buy shares in your company and become one of its owners.
Is equity finance right for your business?
Different forms of equity finance suit different business situations.
It is likely to be most suitable where:
- the nature of a project does not suit bank loans or other forms of debt finance
- the business will not have enough cash to pay loan interest because it is needed for core activities or funding growth
Questions to ask yourself include:
- Are you prepared to give up a share in your business and some control? Investors expect to monitor progress and many seek involvement in significant decisions.
- Are you and your key people confident in the business' product/service? Does it have a unique selling point that singles it out?
- Do you have the drive to grow the business?
- What industry experience and knowledge does your management team have? Is there a variety of skills?
For more information see equity finance.
Watch this video tutorial which outlines the common sources of funding for businesses, including bank finance, equity finance and government grants.
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