Types of Equity Financing For Small Business
Equity Finance is the process of increasing the amount of capital through the sales of shares. Equity finance involves the raining of money by offering different shares of the company to the investors. When a business is said to sell its shares to investors, it is said to sell part of their ownership interest in the return of the cash, like stock financing.
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It is typical for most of the small businesses and start-ups to utilize equity financing several times before the companies can reach the process of maturity. National and local governments keep strict on equity financing so as to ensure that the interested parties follow the right rules and regulations.
Types of Equity Financing
There are different types of equity financing that uses people’s money for funding businesses. They are included below:
1. Initial Public Offering (IPO)
The Initial Public Offering (IPO) occurs when a Company has decided to go public. The Company resolves to sell the shares as the Company intends to transition towards the publicly-traded Company. In order to legitimize this type of equity funding, the offering must comply with the guidelines and regulations established by the SEC (Securities and Exchange Commission).
2. Small Business Investment Companies (SBIC)
A program called Small Business Investment Companies (SBIC) is regulated and licensed by the Small Business Administration (SBA). This program SBIC provides small businesses with Venture Capital Financing. Venture capital firms utilize the money of the investors in start-up businesses – that are possibly high-risk business firms. Venture capital financing is called a competitive method of funding.
3. Angel Investors for Equity Financing
Angel investors are respectable and valuable investors who have large amounts of money for financing the startups. The angel investors are said to be wealthy individuals who look forward to higher returns on their investment money. These investors retrieve valuable information regarding the businesses they invest into.
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4. Mezzanine Financing
Mezzanine financing is the combination of the financing processes that use both equity and financing. This is the equity finance process in which intermediate-sized businesses. This process has an intermediate-risk level. It has a low debt-to-equity ratio that is a sign of less risk.
5. Venture Capital
This is a type of equity financing that offers funding in exchange for the ownership of shares of the business. Venture capitalists usually invest so as to avail the higher return on their investment. Unlike angel investors, venture capitalists are a group of professional investors who invest money in growing startup companies.
These investors may also demand a seat on your board of directors.
6. Royalty Financing
Royalty financing, also called revenue-based financing, is a type of equity financing. In this type of funding, investors give the amount of money in order to purchase the future sales of the product. This financing method is different from angel investors and venture capitalists in the sense that you have to invest in the sales before the approval.
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7. Equity CrowdFunding
Equity CrowdFunding is the most commonly known method of funding in which people invest in the early-stage unlisted Company. The people invest money in order to avail of the shares of the Company. If the Company performs well, the shareholder will also stand to the profit.
Equity CrowdFunding is an online offering that involves investment in commercial enterprises. The owners of the privately-held business raise the funds from the public.
These are the methods of business financing, which are used to develop firms through equity financing. Thus, funds are gathered from investors to fund the business.