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Types of financing (part 2)


Another type of financing beside debt is equity financing. Equity financing means that business raise money through investor by selling the part of the ownership of the company. What motivates investors to get involved is their belief in company's potential and massive return on their investment in the future. It is also called risk capital because return is only possible if the enterprise produces sufficient revenues for that purpose. Equity financing has wide array of capital sources and here are some of them.

Private investment from friends and family - you may think this is the easiest way to raise money because you will contact people that you know and it is likely that they want your business to succeed and they require less material preparation. Ownership sharing may or may be not required and many will enter into agreement through the use of promissory note. Usually people don't have large amount of money to invest in business so it is not very usual to secure all your financing through this type of equity financing. Personal relationship may complicate things and stretch beyond finances so that is a reason why some business owner shy away from it.

Venture capital - it can be individual or a large firm and unlike private investor they have larger amounts of money to invest in businesses. They are interested in small enterprises with extremely high growth potential. They are also very hard to impress and they have demanding criteria so you will have to convince them that your business carries relatively low amount if risk and potential high rate of return. If they manage to convince them to invest in your business they will very likely expect larger share of control and probably a representative in your Board of Directors.

Angel investors - represent informal market of wealthy individuals and groups who invest in startups. They expect healthy profit in return but angel investors will not be involved in day to day management of business. Angel investors often invest in business they are familiar with  and have experience working in and besides funding they can provide you valuable guidance.

Private equity placement - is subject to regulatory and legal requirements but it is not so demanding like initial public offering (selling company's shares to the public to raise funds) For this kind of financing you will need assistance from professional team of financial, legal and accounting advisers. Complete business plan and due diligence are required. Private placement offers equity to relatively small number of sophisticated investors. Through crowdfunding company can raise funds from large number of investors via crowdfunding website.

Strategic partnership - strategic investor has strong interest in seeing your business succeed. They can provide goods, services or attractive credit arrangement in return for your services or equity position.
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