Small Business Equity Financing Options

Small Business Equity Financing Options By Wilson Ziegler, Staff Writer

Equity financing basically means that you accept an infusion of capital in return for a percentage of the profits and handing over a certain measure of control over the business to the investor, or investors. While this is a highly personal decision, the fact remains that raising a large amount of capital necessary for taking your small business to the next stage of growth, and achieving inherent potential, is a very difficult task for a small business owner. Once you embrace the concept of equity investing, the next step is to identify all open options, and cut the best deal possible, which allows you to retain significant control over the direction and day-to-day activities of the business, along with a majority stake in the company.

Equity investments can come in three basic types: First are the Angel, or individual investors, who probably know and trust you from previous association, and are willing to give you a chance to prove your worth.

The second type of equity investments come from venture capital funds, who generally will fund startups, or companies in the early stage of growth, which have yet to realize any perceived potential. Venture funds are generally more interested in the rate of growth and market potential for your product or service. Thus, if you think your business has a unique selling point (USP), which could possibly leverage the business into a market leader with proper marketing and infrastructural changes, a venture fund might just be willing to buy into your idea.

Lastly, you can arrange for equity finance through stock offerings on the market. This is something which you would likely need to spend a year or more for groundwork, valuation and completing the requisite paperwork required. Thus, if you are even at a stage where you see the need for equity funding for your small business sometime in the near future, you should ideally start preparing for it at least a year in advance, whether it be through venture capital or a stock offering.

For amounts above $250,000, it is generally preferable to go for equity financing via a venture fund, rather than borrow from a financial organization. Besides, you will find very few angel investors – Whether they are friends, former colleagues or family – ready to invest more than $250,000. Angel investors generally hit the ceiling somewhere between $100,000 and $150,000. So if you need less than $150k, you should, ideally speaking, be able to arrange equity financing through angel investors. For amounts between $150k and $250k, it is best to work out a mix of angel investors, personal funds and borrowing from a financial organization. For amounts above that, you should consider venture funds, and depending on the current financial and earnings statements, maybe a stock offering.

Please note that in any case, you will be requiring the services of a financial organization, which in many cases can help put you in touch with the right kind of venture capital funds and other investors.