Running a business would be far easier if every business owner had full access to endless capital for expenses. However, we do not live in a fantasy world, we live in the real one, so funding your business will have to come from various avenues. Thankfully, a savvy business owner is no longer tied down to a standard business loan from a bank in order to provide adequate funding. Equity is where a business owner can effectively cut ties with a bank and truly begin to see upward progress. When you are ready to soar, here are 7 types of equity every small to medium business owner can utilize.
Going public is a term used in the business world and many may not realize exactly what that is. Essentially, it is a way to expand business growth through something called IPO or Initial Public Offering. This type of equity funding allows for funding to come organically from investors that are interested in getting in on the ground floor of an investment opportunity. There are specific guidelines for an IPO to help protect the public from possible scams that have happened in the past. This equity option is there for SMBs that have regional or national coverage of their company.
Specialized Business Investment Companies
From wealthy individuals to those looking to give back and help others start their business, offers a wealth of opportunity. Firms within the SBA or Small Business Administration are given the ability to provide adequate funding for the growth of other, smaller companies. This pool of investors receives applications from potential investments and offers funding with fewer restrictions than an IPO.
Equity Financing from Angel Investors
Finding an angel investor can be a little difficult, but these individuals and successful business entities can be a substantial help to SMBs. An angel investor is not one that comes in on the true ground floor of the company, but one that provides secondary funding after the initial startup funding has been exhausted. It allows for a SMB to grow through help from those who have already been there. The investors own a specific stake in the SMB and have some decision making power. For those new to the business world, an angel investment opportunity can prove to be a true life saver.
Certain types of corporate financing options have greater risks than others. Mezzanine financing holds some of the highest risk, but it can also carry some of the largest benefits when the right companies are involved. Mezzanine Financing is a bridge between debt and equity financing. Generous returns are possible as interest is higher, in the range of 12% and 20%, but the financer carries the risk of the company possibly failing and losing their original investment. Mezzanine financing is often used for expansion of an existing company rather than in a startup or those that are in the earliest stages of their business development financing needs.
Among the most popular types of corporate financing options is venture capital investment opportunities. With venture capital investments, the investor works with a budding business as a limited liability representation. Funds are raised from the larger corporations to help smaller entities grow and during the process, the investor has some opportunity to provide input on the new company’s growth. The investing company maintains a larger stake in the smaller company to help it get off the ground, so when the smaller entity grows, the investment entity receives a profit as well. Any loan given to the SMB throughout a venture capital investment does not have to be returned unless the new company folds. Venture Capital investing allows a startup or SMB to grow substantially faster with high investment companies backing their business.
SMBs can sometimes find opportunities for Royalty Financing provided they have potential for a large income stream in the future. With this financing option, capital is provided from a larger firm or individual investor with repayment provided through a percentage of future profits. Royalty Financing works much like an advance on a paycheck. It is important to understand the terms of repayment before investing in this manner so you can ensure you can repay the payment through your profits and maintain overhead and business expenses throughout the endeavor. Examples of Royalty Financing can be seen throughout the music and film industries in which the investing party maintains a certain percentage of profits for the life of the contract.
Sometimes a small to medium business has an amazing idea and business plan, but does not have enough capital to make their idea a reality. In this case, equity crowdfunding can prove remarkably profitable. The SMB owner makes up a business plan and essentially markets the business idea to individuals or other businesses in hopes they will invest in their company. The notion is simple, really. The business owner asks for specific investments from each potential investor and in turn, the investor maintains a small stake in the new company. These investments are relatively nominal and spread across many people and other businesses. The investment shares will increase as the business grows, so the investors will get paid back over time if the business is a success.
Crowdfunding is a quick way to receive a lot of money for your business, but it requires the business owner to be very organized and know their product or service very well. Investors and business owners can see substantial gains from this type of investment opportunity, but crowdfunding can also carry risks as previous scams have been linked to this investment option. However, with the right stipulations and security measures in place for fund exchanges, crowdfunding equity can be one of the best ways to promote and grow your SMB.
When you choose to start your own business or want to grow an existing one, these 7 investment options can be a significant help. As with any potential venture, ensure that you understand the risks involved and do not simply look at the potential for profit. Growing a business of any size will always require a keen commitment and willingness to put forth the work.
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