What is Equity Finance?
Equity funding is often called equity finance, equity loans, private equity, venture capital or private venture capital.
Equity funding can be defined as investment in unlisted companies and is usually seen as an alternative (or an addition) to the more traditional forms of finance such as bank debt.
Equity funding can be derived from a number of areas such as superannuation funds, overseas investors, other companies, high net worth investors, a venture capitalist or venture capital firms.
Equity funding, can provide more flexibility and financial independence than a bank.
How does Equity Finance work?
Typically if a private equity investor agrees to invest in your company, they will require some kind of representation on the board and hold a shareholding in your company.
Normally these investments lack security and as a consequence a venture capitalist will be looking for high returns on their investment which means they will be aiming to identify companies with high growth potential.
The private equity investor or venture capitalist will aim to exit the business usually 3 to 7 years after the investment through the company listing on the stock exchange, selling the business or through a management buyout. Accordingly, the primary return on investment from equity funding is usually through capital gain at the exit stage.
The private equity investor provides the venture capital to form a stable base in which businesses can fulfill their business goals. Venture capital firms have a vested interest in promoting the growth of your business and are able to assist in managing the risks and strategic and operational direction of the company.
When is Equity Finance appropriate?
Typically, venture capital is suitable for less mature companies with developing or under developed concepts or revenue. However equity finance can also be used for more mature established companies to finance expansion or turnaround strategies.
Private equity investors will examine the following key areas when considering an equity loan investment:
- Strength of Management
- Business Strategy
- Target Market
- Barriers to Entry
Whether your business is a start up or an existing company, any period of forecasted growth will bring additional risks which may also stretch your financial requirement beyond your current capabilities.
Bank debt may prove to be too restrictive on cash flow or even impossible to obtain. In these circumstances equity funding may provide you with the much needed capital base as well as the support and partnership you require to fulfill your goals.