18 Apr Equity Financing for Business Funding Solutions
Thousands of small and mid-sized businesses in Queensland, New South Wales, and Victoria rely on commercial loans to buy their own premises. When asked where they plan on borrowing such a huge amount, they would almost immediately point to the state’s leading banks. In truth, there are other commercial funding solutions that bank loans that might actually work better for their situation. It just so happens that banks are the most popular go-to resource.
As the world of financing becomes more and more diverse, alternative funding options that were once considered as unsecure are becoming the lifeline for businesses, especially the high-risk, high-return businesses that banks often turn down. One option in particular, which has recaptured the interest of the commercial property buying community, is equity financing.
What is equity financing?
Equity financing is a method of financing in which a company issues shares of its stock and receives money in return. The money collected becomes the capital fund for the business or for a major expense it entails. Up to 75 per cent of the business can be relinquished depending on the manner by which the equity capital was raised. Simply put, the business owner is selling ownership stakes to other people just to make the business possible to begin with.
Types of Equity Financing
There’s more than one type of equity financing that small businesses can look at, each of which comes with features that suit particular situations. Perhaps the most common is money from family or friends. Entrepreneurs with strong family ties and social networks may take advantage of their situation to raise funds for their business. After all, building a business may further strengthen the bond between them and their loved ones as soon as the business starts generating income for everyone.
Another useful type of equity financing is venture capital from a small business investment company. Businesses just need to make sure that the investment company they are turning to is duly licensed by the authority to avoid possible scam. There are also many independent venture capitalists that are looking to invest in small businesses that have high growth potential. These capitalists, however, must not be confused with angel investors, which are individuals or groups of people who are looking for a high return on investment.
Those who do not wish to sell ownership stake or present a large security may consider obtaining royalty financing instead. In this type of equity financing, future profits or sales are utilized as payment for the debt. The funder provides up-front cash for the initial expenses of the business and agrees to start obtaining a certain portion of every sale at a future time.
Avoiding Mistakes The financing industry is a dangerous place for first-timers. In fact, even experienced borrowers get into trouble from time to time because of the risks attached to every decision they make. This is why it is important to have business finance brokers like IBN Direct in Australia guide you through the process not only so that you can fully understand the process but to ready you for the decision-making part as well, especially if it is equity financing you are looking to fund your business with.