It’s challenging for a small business to raise money to run day-to-day operations and meet other financial requirements of the business. Most of them have to take loans from the banks which is an expensive process and the business has to pay exorbitant amounts of rates which can prove to be financially detrimental to the organisation in the long run. This is why businesses are looking for alternative ways of raising money. One such way is equity financing. Equity financing is where the business raises capital through investors and other companies in exchange for ownership in terms of shares and other finances.
There is a fine line of difference between investing and gambling. People who invest into a business or a stock market have to look into several factors and conditions before investing their money or funds into an organisation. More importantly the investors can become owners. Gambling, on the other hand, is more about playing by chance and the person does not own nothing. A gambling website is similar to an investment website as it provides people with necessary information and opportunities to make money online.
Popular Types of Equity Financing for Small Businesses
There are different types of sources of equity financing available for small businesses, organisations and startups.
Initial Public Offering
IPO refers to a particular business going public. Going public means that the shares of the company are available to everyone. Previously, the shares of the company were restricted to a certain group of people but after IPO, the shares are listed in stock exchanges like the National Stock Exchange and the Bombay Stock Exchange. The business can raise money through IPO with strict compliance with the guidelines by a financial regulator in the country. After registering the IPO, the company gets a listing date. It is the date which tells when the shares will become available in the open market. Once the shares have started floating in the market, investors can buy them and help in raising capital for the business.
Angel investors can be referred to a group of people who have significant money and assets to invest in small businesses. They choose to invest in startups and growing companies. They have a series of conditions and rules for investing in a startup. They not only provide finance to the businesses but also offer required operational, technical and financial knowledge.
This financing includes both equity and debt. Under this type of financing, the business gets a loan from the lender and when it makes sufficient profits will repay the loan under certain pre-mediated conditions. If the business can repay the loan amount, then it’s considered as a regular debt. But under any circumstances, if the business is not able to repay the loan, the lender converts the debt into equity. He takes some control of the company and can claim his share of profits. The risks are assumed by the lenders. They are the ones who draw up eligibility conditions for lending based on the financial performance of the business. Some of the conditions include their ability to pay debts based on cash flow. Since mezzanine is a combination of debt and equity, it is written as equity on the balance sheet. This decreases the debt to equity ratio which helps the business in attracting investments. It offers more returns to business owners than traditional loans.
A venture capitalist is a person that invests funds in business in exchange for ownership of the business in the form of shares. They invest in businesses that are of great value. The significant difference between venture capitalists and angel investors is that investors use their personal finances for investing in businesses. Venture capitalists have a separate fund reserved for investments. They may claim a seat on the Board of Directors after investing in a business. But some of them assume the roles of mentors where they provide the business with the knowledge and technical-know-how of running the daily operations of a business.