There are a lot of factors that contribute to a successful business. But apart from having a scalable business model, a good business coach, and a rockstar team — money is the most important factor.
When it comes to getting finance for your business, there are several methods you can try. There are some business owners who take out credit cards and bank loans. There are other businesses that turn to organisations that specialise in financing new businesses. There are also other equity financing methods that can be used.
One option is equity financing where funds are gathered from investors and give to your business. This method requires you to offer portions of your business through shares to the investors. When using this financing, you will be selling part of your business interest to investors. There are a few times of equity financing that you can try for your business.
Initial Public Offering
According to Investopedia, an IPO or Initial Public Offering happens when your company first goes public. Your business will offer initial shares on publicly traded markets such as stock exchanges. Going public is the terms generally used to state that a company is becoming publicly traded.
When you use this funding, you will need to develop your initial offering in line with the Securities and Exchange Commission established guidelines. All IPOs need to be registered and approved by the SEC. If the offering is approved, the SEC will provide the business with a listing date and this is the date that the shares will be available on the market.
Once this has been done, or before it has ended, the business must start working to ensure investors become aware of the shares and are interested in it. This can be done by publishing a prospectus or creating a campaign that attracts investors.
However, this isn’t an option available for most businesses. An IPO is a goal that comes much later and isn’t an option you should consider right now. Instead, you should look at…
Small Business Investment Companies
The Small Business Administration is the organisation that licenses and regulates a program known as the Small Business Investment Companies. This program can provide funding for all small businesses. This is a very well-known method of funding for small businesses.
With this funding method being popular, it is also more competitive. This will elongate the process of getting the financing that you need for your small business. Fortunately, the underwriting requirements for this funding is less stringent than an IPO. Many small businesses find this better because they do not need an extensive IPO process.
According to equity loan providers Max Funding, small business lenders are the perfect option for acquiring emergency funds, noting that “Unlike banks, you can get pre-approval for a loan within hours with a small business lender. This is a flexible option that allows for shorter loan terms and allows you to only pay interest on the amount you spend”.
An angel investor is an investor who has a lot of assets that can provide financing for any small business. They are generally groups or wealthy individuals who are looking for high returns on their investments. They will also be very stringent about the types of businesses they are going to invest in.
There are some angel investor groups that look for companies in their early stages. They will then be able to provide operational and technical knowledge to the company to help them grow.
This type of financing is a combination of debt and equity. The lender of this financing will provide the business with a loan. If the company does well and everything goes smoothly, they will pay the loan back via the negotiated terms of the financing.
In the mezzanine debt, it is possible for the lender to impose terms such as financial performance requirements to obtain the funding. These terms could be an operating high cash flow ration or high shareholder equity.
One of the benefits for borrowers is that this loan can provide more value than traditional lenders are comfortable to grant. Another benefit is the fact that this is a hybrid finding method. This means that it can be considered equity on your company balance sheet.
When this is done, the borrower will have a lower debt to equity ratio. This, in turn, makes the business more attractive to other investors as low debt to equity ratios are seen as a low-risk indicator.
Venture capitalists are generally businesses that provide funding in exchange for shares or partial ownership of your business. They will want high rates of return on their investment. However, they will not be using personal funds to financing your business as angel investors do.
These firms will generally want a seat on your company Board of Directors. Some companies see this seat as a form of managing their investment. It is important to note that this is an older approach and newer firms will use mentoring to help with the growth of their investment. If you are considering this funding, you should look for firms and individuals who will help grow your business.
Royalty financing or revenue-based financing requires investment in the future sales of a product. This is different from angel investing and venture capitalists as you usually have to be making sales before you get the financing. Investors will also expect to get their return payments as soon as the results of the agreement have been met. They will also provide upfront cash for the business in return for their percentage of your revenue.