1. Equity financing

“Equity” is another word for ownership in a company and therefore; Equity financing is when you raise money by selling shares in your business, either to your existing shareholders or to a new investor.

Giving up equity is giving up some control of your business. Equity investors, basically ordinary shareholders want to have a say in the company operations, especially in difficult times and are often entitled to votes based on the number of shares they hold. So, in exchange for ownership, an investor gives their money to a company and receives some claim on future earnings.

Most investors are much more interested in share price appreciation which is usually directly proportional to company growth. Other investors look out for principal protection and income in the form of regular dividends.

Advantages of Equity Financing

Funding your business through equity financing has several advantages, including the following:

• The biggest advantage is that you do not have to pay back the money. In case of bankruptcy, your investor or investors are not creditors. They are part-owners in your company, and because of that, their money is lost along with your company. In simple terms, your investors share your business risk.
• Skill and expertise gain: Most equity investors bring on board more than just money. They contribute expertise, strategic partnerships, and knowledge, all of which positively contribute to business growth.
• Equity finance is patient capital. Equity investors understand that it takes time to build and grow a business. You will get the money you need without the pressure of having to see your product or business thriving within a short amount of time.

Disadvantages of Equity Financing

There are a number of disadvantages that come with equity financing, including the following:

• The company’s profits are shared with the investor depending on the percentage of investment in put and the terms of investment.
• Delayed decision-making and reporting since you have to consult with the investors before making the decisions of your company since they too are now owners. There is also usually a threat of founder dilution.

WHAT INVESTORS LOOK OUT FOR IN A POTENTIAL DEAL.

There are several things Investors Look for Before Investing In a start-up business. These include but are not limited to:

• Passion and commitment from the start-up owner

An entrepreneur should not just be passionate about their business idea. They need to be committed and “in it for the long haul”. When an investment is made, the investor is also betting on the business owner, they are not only investing in the company. 

• Unique and viable business plan

A start-up proposal should sound like a business plan, not just an idea, when founders propose it to the investor. It needs to be a feasible idea that can be put into action. The company proposal should include something novel and creative. 

• Market opportunity

The market for start-ups is a difficult one, with many new companies failing. Investors want to know the size of the overall market and the total number of potential clients the company has. The investor would hesitate to invest if the planned market size is insufficient since they might not receive sufficient profits. 

• Investor Relevance and the X-Factor

When making an investment, an investor would want to provide money to a business that they can relate to or that they can comprehend. 

They would like to invest in a start-up that is linked to their experience or past investments.

In terms of funding, there is something referred to as the “x-factor.” 

At this point, the investor and the start-up owner have a certain chemistry, and as a result, the investor becomes intrigued by the project and agrees to invest in it.

• Gaining Traction

An investor wants proof of concept in terms of the start-up’s engagement with the target audience and the customer base of the business. 

Start-up business owners should support their ideas by providing accurate information and pertinent figures because investors will want to know how much money they will receive in return and how quickly they can anticipate receiving it.

• Team Structure

Investors also look at the team that handles everything in the start-up business, since this determines management’s ability to execute a business plan. They want to know the size and expertise of the team.

Conclusively, investors do their due diligence before investing their hard-earned money.

Determination of share price

A share price is an amount it would cost one to buy one share in a company. This price is not fixed but always fluctuates.

Initially, share prices are determined through a company’s initial public offering (IPO), in which the price of one share is set according to the perceived supply of, and demand for, that company’s stock. The prices are usually set by a bookrunner (a lead manager) who is appointed specifically to help the company determine an appropriate price for its IPO.

After the IPO, a company’s share price can be impacted by a range of factors. For example, any increase in the number of shares on the market would bring the price down, assuming demand remains the same. Equally, any reduction in demand depending on changes in a company’s senior leadership would reduce the share price, so long as supply remains constant.

2. Debt Financing

Debt financing is the technical term for borrowing money from an outside source with the promise to return the principal plus the agreed-upon percentage of interest.

Debt is a common form of financing for businesses. Debt financing must be repaid, and lenders want to be paid a rate of interest in exchange for the use of their money. Most debt investors require collateral as security for the finance offered. Forms of collateral vary depending on the investor, type of debt, and purpose. For example, if a business wants to take out a loan for buying a Truck, the truck itself can serve as collateral against the loan and the business agrees to pay interest to the lender until the loan is paid off. However, most investors require the presentation of security in form of other assets including land, buildings, cars, etc.

While debt must be paid back even in difficult times, the company retains ownership and control over business operations.

Advantages of Debt Financing

There are several advantages to financing your business through debt:

• The lending institution has no control over how you run your company, and it has no ownership.
• Once you pay back the loan, your relationship with the lender ends. That is especially important as your business becomes more valuable with an updated credit history.
• The interest paid on debt financing is tax deductible as a business expense.

Disadvantages of Debt Financing

Debt financing for your business does come with some downsides:

• It may not be easy to get cash flows to cover the monthly instalments of the debt, adding a debt payment to your monthly expenses assumes that you will always have the capital inflow to meet all business expenses, including the debt payment. For small or early-stage companies, that is often far from certain. The high-interest rates even make the uncertainty worse.
• Small business lending can be slowed substantially, especially during recessions. In tougher times for the economy, it’s more difficult to receive debt financing unless you are overwhelmingly qualified.

Sources of financing

1. Personal Savings or investment

Personal savings refer to money that has been saved by an entrepreneur or business owner and this is invested either in the form of cash or assets to the business.

2. Love money

This refers to seed capital the has been extended to an entrepreneur by family of friends to start a business.  It could be money loaned by a spouse, parents, family, or friends.

3. Venture capital

This   is a form of private equity financing that is provided by venture capital firms to start-ups, early-stage, and emerging companies that have been deemed to have high growth potential or which have demonstrated high growth.

Venture capitalists take an equity position in the company to help it carry out a promising but higher-risk project. This approach involves giving up some ownership or equity in your business to an external party. Venture capitalists also expect a healthy return on their investment, often generated when the business starts making higher profits or selling shares to the public.

Advantages of Venture capital

• Promotes Entrepreneurship: It helps an entrepreneur converts his technical know-how to a commercially viable project with the assistance of venture capital institutions.
• Promotes products: New products with modern technology become commercially feasible mainly due to the financial assistance of venture capital institutions.
• Encourages customers: The Venture capital institutions provide venture capital to their customers not as mere financial assistance but more as a package deal that includes assistance in management, marketing, technical, and others.
• Brings out latent talent: While funding entrepreneurs, venture capital institutions give more thrust to the potential talent of the borrower which helps in the growth of the business.
• As Catalyst: A venture capital institution acts more as a catalyst in improving the financial and managerial talents of the borrowing company. The borrowing company will be quick to become self-dependent and will take necessary measures to repay the loan.
• Creates more employment opportunities: By promoting entrepreneurship, venture capital institutions are encouraging self-employment which motivates more educated unemployed populations to take up new ventures which have not been attempted so far.
• Brings financial viability: Through their assistance, the venture capital institutions not only improve the borrowing business but create a situation whereby they can raise their own capital through the capital market. In the process, they strengthen the capital market also.

4. Angels

Angels are generally wealthy individuals, professionals, or retired company executives who invest directly in small firms owned by others. They are often leaders in their own field who not only contribute their experience and network of contacts but also their technical and/or management knowledge.

Angels tend to finance the early stages of the business and in return for risking their money, they reserve the right to supervise the company’s management practices. In concrete terms, this often involves a seat on the board of directors and an assurance of transparency.

5. Crowdfunding

Crowdfunding is a form of fundraising where a business asks the public for a contribution, usually in exchange for equity in the company.

It usually entails a private company asking large numbers of people for small contributions.

In return for investing in your business, investors will receive equity, though with less liquidity than what they would get with public stocks.

There are various forms of crowdfunding, including:

• Equity crowdfunding, where, in exchange for their money, investors receive shares in a company or the right to a portion of revenues or profits from a specific product.
• Debt crowdfunding, where investors lend their money to a company at relatively high-interest rates, thus mitigating their overall lending risk by spreading a large amount of money in small increments across a large number of loans.
• Donation/rewards-based crowdfunding, where a company sets a fundraising target and asks for donations in exchange for some kind of token or receipt of the eventual product or service to be developed.

6. Business Incubators

Business incubators (or “accelerators”) generally focus on specific sectors by providing support for new businesses in various stages of development. However, there are also local economic development incubators, which are focused on areas such as job creation, revitalization, as well as hosting and sharing services.

Commonly, incubators invite future businesses and other fledgling companies to share their premises, as well as their administrative, logistical, and technical resources. For example, an incubator might share the use of its laboratories so that a new business can develop and test its products more cheaply before beginning production. Generally, the incubation phase can last up to two years. Once the product is ready, the business usually leaves the incubator’s premises to enter its industrial production phase and is on its own.

7. Grants and subsidies

Technically, a grant is a sum of money conditionally given to your business that you don’t have to repay. However, you’re bound legally to use it under the terms of the grant, or otherwise, you may be asked to repay it. It is not always easy to bring innovations to light so government agencies and other donors provide aid to companies. Businesses may have access to this funding to help cover expenses, such as research and development, marketing, salaries, equipment, and productivity improvement.

Criteria for getting a grant

Since grants are usually free of cost, attaining grants can be tough since it’s extremely competitive. There may be strong competition and the criteria for awards are often stringent. Generally, most grants require you to match the funds you are being rewarded and this amount varies greatly, depending on the granter. For example, a research grant may require you to match only 40% of the total cost.

Normally, you will need to provide:

• A detailed project description, including location.
• An explanation of the benefits of your project.
• A detailed work plan with full costs.
• Details of relevant experience and background on key managers.
• Completed application forms when appropriate. Most reviewers will assess your proposal based on the following criteria:
  • Significance
  • Approach
  • Innovation
• Assessment of expertise
• Cost proposal.
• The research plan is unfocused.
• There is an unrealistic amount of work.
• Funds are not matched to the project.

8.Loans

Loans are the most commonly used source of funding for small and medium-sized businesses. Consider the fact that all lenders offer different advantages, whether it’s personalized service or customized repayment. It’s a good idea to shop around and find the lender that meets your specific needs.