When looking to start your own startup, you may be tempted to turn to debt financing. Debt financing includes things like bank loans or private loans. While many business owners are tempted to go this route, it can put you at a loss should you have a less than ideal return on your investments. Equity financing is an alternative to debt financing that can help provide your business with capital, without having to work through a bank. Continue reading to find out more about why equity financing can turn around your small business.
What is Equity Financing?
Equity financing is when you put shares of your company up for sale to investors. Not only can this provide you with a nice flow of capital, but it also allows your investors to have a chance at a high turnaround if the business succeeds. This not only helps you avoid the complications that come from bank financing but can help improve your business’s all-around appearance and engagement levels, as several individuals will be interested in seeing the success of your business.
Pros and Cons of Equity Financing
Some of the pros of equity financing include a fast injection of capital into your business, as well as the added benefit of taking some of the personal risks out of running your own business. While banks and private loan companies require that you pay back your loans, even if your business fails, equity loans do not have this caveat, meaning you are less at risk in the unfortunate event of bankruptcy. In general, equity investment is a way to provide capital to your startup, while still planning for the long-term health of your business.
However, there are a few things to consider before going with equity financing. On one hand, investors are looking to finance longer-term growth, meaning if your business has been experiencing a dip in sales or profits, a bank loan may be a better option. Another thing to consider is selling shares in your business limits your control over your business, and leaves you beholden to your shareholders, who may push for you to make financial decisions with your business that you may not be comfortable with, such as selling your company or bringing your business to the open market. You also may end up paying out more of your profits to investors than you would be paying back with a bank loan, which is something you should consider before choosing equity financing.
What to Do Next
Before deciding on equity financing, you should do some research to find out the different kinds of investors you may be dealing with, such as venture capitalists, angel investors, and more. Make sure to consult with a financial advisor before deciding to go with equity financing, and look into things like anti-dilution clauses to help ensure your investors won’t be out-invested down the road. It is also a good idea to look into the tax benefits of a C-Corp versus an S-Corp, which has different tax benefits and shareholder laws.
Equity financing can be a great way to inject cash into your business and help ensure business growth while allowing you more freedom than a traditional bank loan. If you’re looking to benefit your business, equity financing may be right for you.