What is equity finance?

Using equity finance to get investment for your company

Equity finance is a business funding option that involves selling shares in return for investment. It’s commonly used by start-ups or early-stage company directors wishing to get their businesses off the ground and propelled towards rapid growth.

Equity financing can be obtained in various ‘rounds’ so that businesses seek more investment as they grow. Investors in this space typically include but aren’t limited to venture capitalists, angel investors, private equity firms, and equity crowdfunding platforms.

Why choose equity finance?

Although this type of funding involves dilution of ownership in your company, the benefits are significant. Equity investors also offer their expertise and business acumen along with the funding, so you can typically access a wealth of knowledge.

Equity finance may be crucial for businesses with few assets that they can use as collateral or for those who want to avoid the monthly repayments required by traditional company financing such as a business loan. Indeed, the considerable injection of capital following an equity finance deal can be fundamental in setting up a business for rapid growth.

Different types of equity finance

Equity funding is available in various forms but angel investing and venture capitalist financing are among the most common.

Angel investors

Angel investors are typically successful business people themselves who use their own funds to invest in a business, usually at an early stage. They take a minority stake but look for high-potential investments in terms of rapid growth and a high return on their investment in the future.

Venture capitalists

Venture capitalist firms may focus on start-ups or young companies with a proven history of success or those that are disruptive in their sector. They’re firms that pool investment from various sources into a fund – this can include pension funds, for example, insurance companies, and high-net-worth individuals.

Venture capitalism is a high-risk/high-reward form of investing but investors typically receive preference shares that convey certain rights, such as a seat on the board. This enables them to influence decisions at the highest level.

Pros and cons of equity funding

Pros

• No monthly repayments or defined date for returning on the investment
• Valuable access to investor expertise and established networks of business contacts
• Larger investment amounts available based on a company’s potential

Cons

• Dilution of ownership
• Increased legal and administrative requirements
• Loss of some future profits

Is equity finance right for your company?

Equity finance may be a good option if your company has fast growth potential or an innovative product or service that attracts equity investors. Having a defined exit strategy in place, such as an acquisition or buy-out, can also be a key factor in attracting investment of this type.

Selling shares in the company to new or existing shareholders offers an alternative to traditional business financing, which can be out of reach for some companies that have no predictable cash flow.

If you’re considering equity financing as a way to inject capital into your company, we can help you narrow down your options and find the right investor. UK Business Finance are commercial finance brokers with a wealth of experience – please contact one of the team for more information.