Small businesses often need money. Equity financing can provide an infusion of cash and other advantages to businesses looking to grow.
Equity financing is when you get cash from an investor in exchange for a share of the business. In other words, you’re selling a percentage of your business (think Shark Tank). There is no loan to pay back. Investors are betting on your business to succeed. When it does, they’ll share in the profits.
Equity financing offers some definite advantages:
- Cash Infusion – Equity financing can provide working capital that can be used to grow your business. You will have more cash available than if you used debt financing because there are no loan payments.
- No Burden- One of the primary advantages of equity financing a lack of obligation to repay the money, so there is no additional financial burden on the company.
- No Risk – Another big advantage of equity financing is that the investor takes all of the risk. If your company fails, you don’t have to pay the money back.
- Network – Investors want your business to succeed so they often help with introductions to members of their professional network, offer advice, and provide feedback.
- Intellectual capital – Most investors have been successful in business. Their experience and expertise can be a real advantage.
Debt financing is just what it sounds like. You get a loan and take on debt that will need to be paid back. Anybody who has ever been in debt understands the downside to this approach. The debt becomes an additional expense that must be repaid on a regular schedule. If your company hits hard times or the economy has another meltdown, you’re still on the hook to pay back that loan.
Rather than racking up debt to finance your business, you can give ownership in exchange for the money you need.