Equity Finance

Equity finance is risk capital invested in a business for the medium to long-term in return for a share of the ownership.

Unlike debt finance, equity finance investors do not normally have rights to interest or to be repaid at a particular date. Their return is usually paid in dividend payments and depends on the growth and profitability of the business.

Because of the risk to their funds, equity investors will expect a higher potential return than for safer or more secured investments.

There are both advantages and disadvantages of equity finance which need to be considered.

Before seeking equity finance, ask yourself the following questions:

• Are you and your key people confident in the business' product/service?
• Does it have a unique selling point that singles it out from the competition?
• Do you have the drive to grow the business?
• Does your management team have sufficient knowledge and industry experience?
• Does your management team have a variety of complimentary skills?
• Are you prepared to give up a share in your business and an element of control?

There are two main providers of equity finance for private businesses:

• Venture capital - Most often used for high growth businesses destined for flotation or sale.
• Business angels - They can offer investment, particularly in the early or growth stages of development.

Advantages and disadvantages of equity finance

Equity finance can sometimes be more appropriate than debt finance, but it can place different demands on you and your business.

Advantages

• The funding is committed to your business
• Investors only realise their investment if the business is doing well
• The right business angels and venture capitalists can bring valuable skills, contacts and experience to your business and can assist with strategy and key decision-making.
• In common with you, investors have a vested interest in the business' success, ie its growth, profitability and increase in value.
• Investors are often prepared to provide follow-up funding as the business grows.

Disadvantages

• Raising equity finance is demanding, costly and extremely time-consuming.
• Potential investors will seek highly detailed information on you and your business, they will closely scrutinise past results and forecasts and will probe the management team.
• Depending on the investor, you will be subject to varying degrees of influence over the management of your business and making of major decisions.
• You will have to invest management time to provide regular information for the investor to monitor.
• Your share in the business will be diluted.
• There can be legal and regulatory issues to comply with when raising finance.

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