Equity financing is a method of small business finance that consists of gathering funds from investors to finance your business. Equity financing involves raising money by offering portions of your company, called shares, to investors. When a business owner uses equity financing, they are selling part of their ownership interest in their business. Here are seven types of equity financing for start-up or growing companies. This type of funding requires developing the offering in compliance with the guidelines established by the Securities and Exchange Commission (SEC). The SEC requires that the IPO be registered and approved. If approved, the SEC gives the business a listing date. The listing date is when the shares will become available on the market they are going to be traded on. Once this is done (or even before), the firm needs to start working to ensure investors are aware of and become interested in, the shares. This is accomplished by publishing a prospectus and beginning a campaign to attract investors. Venture capital financing is a competitive method of funding since a venture capital firm may have any number of firms and projects competing for money at a given point in time. The underwriting requirements are considered to be less stringent than those for an IPO. This makes it an attractive opportunity for smaller businesses without the need for an extensive IPO process. Some angel investor groups actively seek early-stage companies in which to invest and they provide technical and operational knowledge to startup ventures. These angel investors may provide the second round of funding for growing companies after the initial start-up funding. With mezzanine capital, the lender can set terms such as financial performance requirements for funding the company. Examples of terms could be a high operating cash flow ratio (ability to pay off current debts) or a high shareholder equity ratio (value for shareholders after debts are paid). One benefit for borrowers is that mezzanine capital can present more value than a traditional lender would be comfortable granting. Another is that since mezzanine debt is a hybrid form of equity and debt, it is considered by accountants to be equity on the balance sheet. It can bridge the gap between the point at which a company no longer qualifies for start-up debt financing and the point where venture capitalists would be interested in financing the firm. This gives borrowers a lower debt-to-equity ratio, which in turn can attract investors because a low debt-to-equity ratio is usually an indication of less risk. Unlike angel investors, venture capital firms don’t use personal funds for investing in startups. These firms consist of a group of professional investors who pool money to invest in start-ups or growing firms. Venture capital firms may also want a seat on your board of directors. Some venture capitalists see a board seat as a form of managing an investment. Many venture capital firms have transitioned to a mentoring approach to assist with investment growth. If you are considering venture capitalists, look for firms that are interested in your firm’s line of business and helping it prosper. Investors will expect to begin receiving payments immediately as a result of the agreements made with the lender. Royalty financers provide upfront cash for business expenses in return for a percentage of the revenue received from the product.
