What Small Businesses Must Know About Equity Funding

Small businesses have access to several ways to raise the capital they need today. Some of them include taking bank loans, borrowing from family or friends, peer-to-peer loans, credit cards, trying to find an investor in Texas and a variety of crowd-funding options. Equity financing is an interesting model that has benefited a lot of businesses on the earth today. Those businesses that can make a considerable profit within a short amount of time with the right amount of up-front capital can think of equity financing.

The term equity indicates the ownership stake the investors and the business owner have in a company. Equity financing involves raising money through a handful of investors. When you opt for equity funding, you are selling a part of the company’s ownership interest to the investors.

In other words, equity funding will mean an equity investor in Texas is, in fact, buying a share of the company in return for a percentage of its profits it will make in future. Equity funding is based on the belief that the company has the potential to make profits and that the investors are expecting the returns on their investments at some point of time in their life. Here are the different types of equity funding you will have to know as a small business owner.

Financing by family and friends

If you have strong family connections or social networks, you can think of this option for growth stage company funding. You can ask your close contacts for investment funding. Though this is a common option, the risk associated here is the possibility of risking the relationship if you cannot pay back the money at some point of time.

Small business investment companies

This is a regulated program offered by Small Business Administration (SBA) which is a licensed body to fund small businesses. This is a highly competitive kind of funding that comes with a loser underwriting requirements.

Angel investors

Angel investors are those that provide the second-tier funding a business will need. These are wealthy individuals or groups of people who expect high returns for their investment. Usually, these are very stringent in their expectations about the businesses in which they invest.

Mezzanine funding

In this process, the lender actually gives a loan and when the things go well, the company pays back the loan as per the terms negotiated while lending.

Venture capital

Through this process, the owner gives a part of the ownership to the investors and usually the representatives of the venture capital firm will be part of the board of directors.