In this article we will be dealing about Equity Finance. There are chances, one can be declined for their application on Business loan. This is when, Equity finance comes into picture. If the company need money, then it will sell its shares to the investors and when it will get the profit then the company will provide the profit share to the investors. However, if the company collapses then the assets will be liquidated and after clearing the debt, the investors will get the money. But from the end of the investor, the definition of equity will be the difference between the assets and the liability of the owner.
Now, you are clear with the basics of the Equity and it’s time to use the equity in a small business in an effective manner and for your convenience, few useful points are listed below.
- Ideal Time
The best time to go for equity financing is amid the startup of the business. In this case, you will find the angel investors or venture capital that will provide the financial support to your business and in return, they will directly/indirectly control your business, might be they will become the members of Board of Directors or they will formulate the rules and regulation to run the business. Whatsoever, it may be but the best part is that you will get a good amount and can utilize the same to enhance your business.
- Know your business elevation
In the Equity Finance, it is quite hard to find out the investors and to get the same; you will have to try hard to make good presentation of your business so that the investors will be compelled to invest in your business. So, to make that possible, you will have to prepare a good business plan and it must have a broad future scope and financial stability and then tailor the summary of the same plan in front of the investors.
- Recognize your investor
Most of the investors will look for the stake of 20% or more in your business and if you planned to get a positive result from your business in future, then you will have to check the background of the investors and for the same go thoroughly with the investor’s credit score and the performance in its organization. This will help you to secure your business and if the investor is trustworthy, then he/she will support you in the long race of the business.
- Be prepared for the legal terms
Equity is a short term process and requires the documentation process, as there is a contract between the owner and the investor and to avoid the legal implications, you must sound good in the taxation and legal standards. Amid signing the contract, make sure you have gone thoroughly with the documents and if possible consult with your legal advisor.
- Mezzanine Finance
Mezzanine is a different kind of financing option where debt and equity together plays a crucial role. If the lender invests in your firm and all went good, then you will pay back the loan amount. However, if in case, your business didn’t work well, then the investor will convert the loan amount into equity and will have the right to claim the future profit. But, you will have the 100% ownership right as long as your business is giving profit.
- Royalty Finance
It is different from Venture Capital and Angel Investors and in this type of equity, the lender will invest on your business and once you start getting the profit from the business, then you will have to give royalty to the lender, means some percentage of each sale of the equity.
- Risky Business
In small business, most of the banks and the lenders pull out their legs and usually denied to offer the loan as they feel that the business is risky and the chances of drainage of money will be higher. So in this case, Equity will help you as there are many investors in the financial market who like to invest in the risky business and your job is to find out such investor as the process is bit tidy and it will take some time but don’t lose the hope.
- Balance Business Debt
If your credit score is worst and your business have a lot of debt, then most of the banks or the lenders will deny offering the loan and in this situation, the equity is the best option for you because the investor won’t look for your past debt history and they prefer to focus more on the profit and nature of the business. So, they will invest in your business but make sure your business plan must have the scope in the future.
- Angel Investors
Angel Investors can support your small business because they look for the high return against the investment. They also provide assistance in the operational part of your business and will support your business in all the ways. Now, your job is to find out the Angel Investor who can take your small business to another level.
- Venture Capital
In this equity also you will get a chance to empower your small business and if you find a good investor in this category, then they will provide you all the assistance needed for your business and in return they will take some portion of your ownership or maybe they will ask for their representative in the Board of Directors.
Get an Expert Advice
To run any small business successfully, selection of the proper source of funding is mandatory. So, it is advised to take the assistance from an expert as they have in-hands experience in this field and can they will guide you in an effective manner for the growth of your business.
So, these were the alternative of the loans for small business. Equity Finance always supports the small business but it should be used wisely and the owner of the business has to focus more on the selection of the investor.