- September 22, 2020
- Posted by: saenicsa
- Category: Accounting, Business plans, Consulting, Finance & accounting, Investments
Getting the financing you need is very important to any businesses’ success and there are various different ways that this can be accomplished.
What exactly is financing? Financing is a process in which funds are obtained so that a business has sufficient capital to cover costs and/or expenses. Many common ways of obtaining financing is through banks, credit unions and other financial institutions.
Now, what is equity financing? Well this is financing a company through the sale of shares, ergo equity. So, unlike a bank there is no guarantee or collateral that is needed, instead the person or group that provides funds for financing operations will be compensated by obtaining equity in the business.
There exist various methods that a company can finance its operations through the sale of equity, here are 6 of the most common methods:
1. Startup Capital
The initial startup capital that the majority of businesses start with is usually provided by the Founders.
So, it is important to keep in mind when starting a business how much capital will really be needed. A helpful exercise is to project at the least the initial 2- or 3-years’ worth of income and expenses so as to ascertain viability of the project.
Then, discuss with any other partner’s so as to see the amount each partner will put into the company to start up.
Finally, make sure to fulfill any other legal obligations to formalize the company, this way the investment is taken more seriously between partners.
2. Venture Capital
In business, venture capital funds and/or angel investors are terms that are used when referring to either groups or individuals that fall into the following criteria:
1. Very wealthy;
2. Have sharp business acumen; and
3. Want to invest in entrepreneurs using their own funds following their own guidelines.
These groups and individuals invest in company’s that many times are starting out or are going through growing pains and are having difficulty in expanding current operations to keep up with demand.
3. Private Equity Funds
Private equity funds are corporations that in a similar fashion to venture capitalists look to invest in companies that are growing.
Even though there are some similarities, there are also important differences, such as the private equity firms being less risk adverse and typically interested in longer term investments that are more capital intensive.
4. Going Public
An Initial Public Offering (IPO) or going public is another measure that can be taken to raise equity capital.
This method of acquiring financing takes time, is costly and very unpredictable. So, just as it can be a total success, it can also turn out to be a complete failure.
Additionally, going public is an option that only well-established companies have available, due to the obligatory administrative, financial and other requirements that come with the process of preparing the IPO.
There are also a few negative points that need to be kept in mind when going public, such as the owner’s loose considerable say in the direction the company takes going forward. Increase governmental and third-party scrutiny on the management of the business and other company matters.
Although, going public may also the opportunity for explosive growth in very little time which would impossible for a private company to obtain within the same period.
5. Secondary Equity Offering, or Seasoned Equity Offering
Companies that are already listed on a public stock exchange can offer additional shares in case it needs additional capital for financing operational expenses.
This is known as a secondary equity offering. It is important to keep in mind that this type of offering the company must also time and prepare well for. The better the share price is the better the sale for the company. Also, if the company sells too many shares this may inadvertently open it up to a takeover, so caution needs to be exercised.
6. Private Placements
A private placement is a sale of shares to a pre-selected specific group of either individuals, companies or institutions.
This sale is done privately and not on the open market.
The terms therein are completely up to the parties involved.