Equity Financing

This type of financing allows investors to buy into the ownership of your business.

Advantages:

Equity financing provides capital on a permanent basis with no repayment of principal or interest required. It adds to your company’s net worth, thereby improving the financial stability of the business and its ability to obtain debt financing. It can also result in outside expertise being added to the management or board of your business.

Disadvantages:

It carries with it a higher cost of capital and is therefore more expensive. It dilutes your ownership control of the business, and profits must now be shared. Equity financing is a permanent investment and may be difficult to obtain. It can create a conflict of interest between yourself, the business founder and the outside investor(s). It will also require more detailed and timely reports.

Private Investors
These include family, friends and colleagues, as well as sophisticated private investors, such as wealthy individuals or so-called “angels.” This final category represents an excellent source of capital for small growing ventures. Often the size, growth rate and investment amount of a small business are too small to attract a venture capital firm. However, this may represent an excellent opportunity for the wealthy individual or successful entrepreneur looking to assist another entrepreneur. Private investors are difficult to find and require detailed business plans. Investors may be identified by contacting accountants, bankers, stock brokers ,venture capitalists or entrepreneur clubs. You must determine that your goals are compatible with those of your prospective investor.
Venture Capital Firms
These are the most risk-oriented investors. Most venture firms have specific investment preferences – both in terms of business stage (ranging from seed stage to buyouts and acquisitions) and industry. In addition, venture capitalists generally have a large minimum size investment requirement. They are looking for rapid growth and high returns. The most important factor a venture capitalist considers is the management team and the ability to recapture his/her investment with a substantial return within five to seven years. Venture capital is typically available to less than one-half of one percent of all new businesses.

SBA’s Venture Capital Programs

Small Business Investment Companies (SBICs)
These provide equity capital, long-term loans, debt-equity investments and management assistance to small businesses, particularly during their growth stages. The SBA’s role consists of licensing the SBICs and supplementing their capital with U.S. government-guaranteed debentures or participating securities. SBICs are privately owned and managed, profit- motivated companies investing with the prospect of sharing in the success of the funded small businesses as they grow and prosper. For more information, visit www. sba.gov/.
Angel Capital Electronic Network (ACE-Net)
This provides an Internet-based secure listing service for entrepreneurs seeking equity financing of $250,000to $5 million from accredited “angel” investors. The “angels” using ACE-Net can negotiate directly with listed companies to provide equity capital funding and advice for a stake in the entrepreneur’s corporation. ACE-Net is operated as a partnership between the SBA’s Office of Advocacy and a number of nonprofit organizations nationwide. For more information, visit SBA’s home page, under Offices & Services.
Private Or Limited Stock Offerings
This is a form of equity financing that may be ideal for the small company. It affords the company the opportunity to raise significant amounts of equity from outside investors without the high cost and regulatory burden of a full-scale public offering of stock. These sales are still subject to some state and federal regulation, and you must make sure they comply with all the provisions that exempt them from the more rigorous registration process involved in a public offering. Your private offering must consist of equity, debt or a combination of the two. The private placement may be sold to wealthy individuals, venture capital firms or institutional investors, such as insurance companies, pension funds, trusts or mutual funds. Institutional investors prefer to purchase private placements in the form of debt instruments since they prefer to receive a fixed, relatively safe return on their investment due to their fiduciary responsibilities.

Going Public

While not many small companies elect to go public, offering shares of stock in the company to the general public, it is certainly an option for the profitable, well-managed, growing small business. There are several reasons why you might decide to go public. It gives the business access to growth capital and can allow you to cash in your equity in the company. Through the growth in the equity base, the business can be leveraged to allow for increased borrowing capacity. Public market funds are not restricted and more attractive incentive plans can be structured. It can also enhance your reputation. However, the negative aspects of going public include the loss of control of your business and increased pressure to grow and produce greater earnings. There may be pressure to shift your business’ emphasis to increase stock value over generating a profit. There will be increased documentation, reporting, regulation and higher legal and accounting expenses. The public offering process is expensive and time consuming.

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SBA’s Venture Capital Programs

Going Public

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