Equity financing refers to the process of raising working capital via the sale of company shares. Businesses raise funds because they generally have a short-term requirement to pay their bills or have a long-term objective of expansion. In both of these cases, they need money, and one of the most effective ways for them to receive funds is via equity financing.
Kavan Choksi speaks on small business equity financing
Kavan Choksi is a business and finance expert with extensive knowledge in cryptocurrencies and investments. He also has a keen interest in jazz and the glorious history of music in America. When it comes to debt financing, buying a home or car or using your credit card are examples of debt financing. You receive the loan from a business or loan and promise to pay it back with a specific rate of interest. Debt financing operates in a similar manner for your business.
In the case of debt financing, your relationship with the lender ends when you repay the loan entirely. However, in equity financing, you need to share the control of your company with the angel investor who issues you the funds. You do not have to pay back the funds, but the investor will have control over your business affairs.
Need for equity financing
Equity financing is deployed when companies, especially start-ups, have short-term needs for cash. It is common for them to resort to equity financing many times during the process to establish them as a dominant presence in the industry.
Factors to consider before taking equity financing
Before it comes to considering whether to take debt financing or equity financing for the business, company owners must ask themselves some questions. They should determine the source of funds that is the most accessible for it, the cash flow, and how important it is for you to retain the ownership of the company.
Now, if you opt for small business equity funding, you can only get back the company’s complete control by repurchasing its shares. This process is known as a buy-out. However, the process of buying back the company is more expensive than the funds that the angel investor gave you.
Laws in the USA that govern equity financing for businesses
The process for equity financing is governed by rules that are imposed by national or local securities in most jurisdictions in the USA. These regulations have been set to protect the interests of the public from unscrupulous elements which might raise funds from unsuspecting business investors and vanish with their proceeds.
The prospectus or the offering memorandum that contains extensive data to help the business investor to make an informed choice on the financing pros and cons accompanies equity financing. The message and prospectus will give them an insight into the activities of the company, data on its directors and officers, how the proceeds of the company will be used, its risk factors, and financial records.
According to business and finance expert Kavan Choksi, equity financing places no additional financial burdens on the company. However, you need to consult the investors for every decision you take about the company and give them a share of the profits it earns.
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