Equity financing, raising capital during the start-up phase of a business or for the development or purchase of a new commercial property can present challenges to an entrepreneur or property developer.
There are numerous different options when it comes to finding finance to fund your business, of which two are the major types of financing: equity and debt finance.
Generally, there are two major types of financing for raising funds, including., angel investors or business angels, venture capitalists, institutional investors, crowdfunding platforms, alternative finance platforms and the stock market.
What is Equity Financing Definition
Equity finance is an alternative to borrowing money to fund your business is investing either your own money (if you have it) or someone else's money into your business.
This finance is the method of raising capital by selling a share of the company stock to investors or financial institutions.
Also, venture capitalists and angel investors like to finance firms during the startup stages, as high growth and cash out of the venture once it's established.
In return for the investment, the shareholders receive ownership interests in the company.
Basic differences between the equity and debt financing
The basic differences between the debt and equity markets include the type of financial interest they represent. Equity finance often means issuing additional shares of common stock to an investor. Whereas debt finance means borrowing money and not giving up ownership.
Read more Debt vs Equity in the real estate crowdfunding structure
The Main Source of Equity Financing
The main source of equity financing is the most popular mode of financing for a company because the capital can be generated by the business internally.
1.Angel Investors and Business Angels
Angel investors are wealthy individuals who put their money in businesses who they believe have the potential to generate higher returns in the future. They bring money to the company by purchasing a stake in it, as well as skills, knowledge and experience.
Venture Capital is private equity from well-known Investors, who invest in businesses they expect to grow at a rapid pace and have the potential to list on stock exchanges in the future.
Venture capital is also termed as private equity finance. The venture capitalists purchase a larger stake in the company in comparison to angel investors and therefore, bring more capital to the business.
The venture capitalists purchase a larger stake in the company in comparison to angel investors and therefore, bring more capital to the business.
3. Institutional Investors
Institutional investors include insurance companies, mutual funds, pension funds, etc. These institutions have large sums of money and make an investment in private companies.
4. Crowdfunding or Crowdsource
A collective group of people, known as 'the crowd', invest in small business or early-stage startup companies, because they are interested in a project.
The crowd can each invest with a smaller parcel of money and each small parcel is pooled to form the investment.
Learn how equity crowdfunding works
5 .Alternative Finance
If your small business cannot obtain bank finance, there are other options available via alternative finance platforms. The UK is leading the growth of Alternative Finance platforms - via a new government scheme where the UK's biggest banks pass on details of any businesses they have rejected to three alternative finance providers
5.The stock market
Joining a public market or stock market is another route through which equity finance can be raised. A stock market listing can help companies access capital for growth and raise finance for further development.
The Advantages and Disadvantages of Equity Finance
We have discussed the advantages and disadvantages of equity financing to understand below.
With equity based financing, there is no loan to repay. This offers relief in several ways.First, the business doesn’t have to make a monthly loan payment.This can be particularly important if the business doesn’t initially generate a profit. This also frees you to put more money into growing the business.
Unlike debt finance, you don't make repayments on investments. Not having the burden of debt can be a huge advantage, particularly for small start-up businesses.
・Wealth advice and experience
Investors contributing to fund the business or property often provide invaluable experience, managerial or technical skills, contacts or networks, and credibility to the business.
・Creating the next round of founding
Investors who have already funded the business or property are often willing to provide additional funding as the business develops and grows as a great progress.
・Shared ownership and profit
In return for investing funds into the property or business, you will have to give up some control of your business or ownership of property, as Investor expect a piece of the profits.
Accepting investment funds from family or friends can affect personal relationships if the business fails.
・Long-term with money
Investors lend their business expertise and management skills to the company to safeguard their equity position.These investments are also for the long term, but they require more time and preparation to secure.
Example of Equity Funding for Property Finance
Jack Quigley as an Investor, invests $1,000,000 in a new property development company with a potential growth to acquire 10,000 of the firm’s 300,000 total shares outstanding.
After two years, the property project grows and needs additional capital. CrowdfundUP's management decides to raise funds by issuing new stocks and giving a percentage of ownership to more investors in exchange for cash.
He agrees to invest $300,000 at a share price of $60, thereby getting another 5,000 shares.
Before the stock issuance, Jack controlled 10,000 shares of the firm’s 300,000 total shares outstanding. After the equity financing, he controls the 15,000 shares of the firm’s 300,000 total shares outstanding.
Crowdfunding is also a way of capital finance for your business through donations from the general public.
Crowdfunding Platform helps your Finance
Property crowdfunding platforms such as CrowdfundUP enable property groups to list of equity-financing needs on the platform, such as equity and debt financing, and a network of investors to provide this financing via the pooling together of funds.
If you are looking for equity financing to fund your development project, visit CrowdfundUP's registration page or contact us at firstname.lastname@example.org
CrowdfundUP is an investment platform that allows people to invest in Australian real estate with as little as $1000. You can start Investing in Australian commercial real estate via our short term or long term investment opportunities.
The information in this article is general in nature. Any advice it contains is general advice only and has been prepared without taking into account the objectives, financial situation or needs of any particular person.
Aug 24. 2017
The article content is not intended to be a substitute for professional advice and readers are urged to seek their own appropriate advice before making decisions.
Any reference to a particular investment is not a recommendation to buy, sell or hold the investment.