Glossary

Equity financing

So, what does it mean when we talk about equity financing then? Quite simply, it allows you to raise funds by selling shares in your business. In return, you get an injection of cash. There's no hard and fast rule as to why you might consider this option. But it can be a highly effective solution for your business.

SME equity financing is becoming more popular too. In 2020, the British Business Bank found that smaller UK firms raised nearly £9 billion. That's a 9% increase on the total for 2019.

The key thing to remember is that equity finance means you'll be handing over part of your business to another person or institution. Of course, this also means you won't be obliged to pay back any of the funding you raise. Instead, investors get back what they put in by taking a share of your profits.

It's one commercial finance option for you to consider if you need help raising funds. You may know of a potential investor already from your network of contacts. Or you might need to call on an expert equity finance broker to help connect you. Either way, equity financing could be the fastest and easiest way to secure funding – without taking on any debt at the same time.

What can equity financing be used for?

In simple terms, there's no restriction on what equity financing can be used for. And there's no set rule on when it could be most beneficial to your business.

As a start-up, you might lack the credit rating or physical assets to get a bank loan. This can be really frustrating as you try to make something from nothing. But you may use equity financing to secure the large sums that'll help your business take flight. It could even be your only option.

For established firms, many situations call for a large cash injection. Do you want to move to new premises? Bring in more staff? Offer new products and services to your clients? Or perhaps you're thinking about buying another business?

In all these situations, you can explore various funding options to make it happen. Yet, business equity finance is the only solution that means you aren't restricted by ongoing loan repayments.

How does equity financing work?

It won't matter if you're starting out or have been operating for years. Business equity finance is an option at all stages of the journey. And while it does mean selling a stake to a third party, the funding you'll receive can make all the difference. It can help you grow your business in terms of its scale and its profit-making potential.

Here's how it works:

−       As the full owner of a business, you want to raise capital

−       An individual or institution will make an investment offer

−       The offer will be in exchange for a share in your business

−       If you accept, you get the funding and lose full ownership An example offer might be £500,000 in exchange for 20% ownership of your business. Once you accept, the investor will take control of that share and be able to influence business 

The different types of equity financing explained

SME equity financing isn't always a world that's easy to enter. You need to know the different types of equity financing. There are a few different types that could be the ideal solution.

Angel investors

An angel investor can be one person or a larger group. They can invest large sums of money but are also likely to have experience in your sector. As such, they can offer other practical support too – hence the name "angels".

Venture capital 

 If your business has high growth potential, it could well attract the interest of venture capitalists. With their ability to invest a sizeable amount of capital, this form of equity finance can really take your business to new heights.

Initial Public Offerings (IPOs)

Rather than using one specific investor, one option is to raise the funds you need as a collection of smaller investments. An IPO is where your shares are available to members of the public to buy on the open market.  

Government initiatives

The UK government has created four initiatives to help businesses get equity financing. Each one offers tax relief to potential investors who buy/hold shares for a set period. 

How do I know if equity financing is right for me?

Like any finance solution, equity financing isn't necessarily right for everyone. Essentially, the question you need to ask yourself is this: Are you ready to let someone else have a say over how your business is run? If the answer is yes, it could be a small price to pay for the funding you're looking for. If not, however, explore one of our alternative finance solutions instead.

It can also help to know what your aim is. Is the capital needed for a longer-term vision? If so, this could be an option to consider. If short-term cash flow relief is your main goal, choosing a debt-based financing option could be a better fit. Let Nucleus help you reach the right decision. Get in touch for a consultation with one of our experts.  

How do you apply for equity financing?

There are two paths you can take when it comes to raising finance through equity.

The first is to deal directly with a potential investor. You might have a pre-existing relationship with them already. Or you may be introduced to them by a third party. Either way, you're free to reach an agreement that works for you.

Alternatively, you can speak to an equity finance broker. Their role is to make the process nice and simple. This includes finding the right investor for you – based on how much finance you're looking to raise. It'll also depend on how much control of your business you're willing to sell.

Am I eligible for equity financing?

It's unlikely that you'll face any strict criteria to secure business equity finance. Whether you're new or firmly established, you could secure this type of investment for your business.

Of course, investors will have their own terms and conditions. So, it might be that one investor is willing to inject the funding you need but another isn't. It's a point that your equity finance broker can help with.

In some cases, however, you may find there are some restrictions. These can include total asset value, number of employees, and the sector in which you operate.

If that stands between you and securing the funding you need, there is always another way. At Nucleus, we're the leading alternative commercial finance provider. And we offer a full range of dedicated types of funding that can help you keep going – or go further.

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    What are the advantages of equity financing?

    In the right situation, the benefits of equity financing can be numerous. In the first instance, it's an option that won't leave you paying back any debt. So, you'll have no interest adding up over time. And you won't be making any monthly repayments.

    For some companies, one of the biggest benefits of raising finance through equity is how much investors are willing to put in. You can usually expect to raise much more capital using equity compared to debt finance.

    Your investors may also be able to provide extra cash over time too.

    Not only that, but your investors can bring valuable skills and contacts to the table. When you're growing your business, it won't all be about the money. Knowing how best to use it and who to talk to can be just as important. 

    What are the disadvantages of equity financing?

    The major disadvantage of equity financing is the compromise you have to make. In exchange for your capital, your investors will get a say over how to run your business. Depending on the type of equity financing you choose, this can be quite a major and disruptive decision.

    If you no longer have sole control, you can find that working with others creates tensions and conflict. You can even find that investors have strong ideas on how their money is being used, not to mention the fact they'll be entitled to receive a share of your profits as their return. 

    How important can equity financing be to my business?

    In some cases, you can't understate the importance of equity financing to a business. It could be the catalyst to your start-up becoming the next big thing. Or it'll be what drives an existing company to brand-new heights. It can also unlock a wide range of skills and sector experience you never knew existed – or couldn't gain access to.

     

    How much business equity finance can I raise?

    The simple answer? There's no limit. The British Business Bank data shows that £4.6m was the average deal size in 2020. It's a figure that has been trending upwards since 2013, and it looks set to continue. The average deal size in Q1 2021 grew to £7.6m – up 64% year-on-year.

    Some factors can affect how much equity financing could be worth to your business. It depends on the equity you hold, and investor appetite is also a significant factor.

     

    Do you have any examples of companies that use equity financing?

    There are loads of examples of companies that use equity financing. Some businesses will even use a mix of equity and debt financing at various phases of the journey. From the start of your business through to its next chapter, equity financing is commonplace.

    Tech firms are one of the best examples of companies that use equity financing. In 2020, 46% of all equity investment was in this sector. But there was also significant growth in the number of firms in business and professional services and industrials that received funding this way.

     

    Equity financing vs. debt financing: What's the difference?

    If you want to raise capital for your business, equity financing is one of the two broad options open to you. The other is debt financing, which includes options such as business growth loans.

    With equity finance, you sell a share of the equity in your business in exchange for investment. But debt financing is where you borrow the money you need and pay it back over time (as well as interest). It does, however, mean you retain full control of your business.

    The option you pick can have knock-on effects, however. Once you repay a debt, for example, that's it. You no longer need to maintain a relationship with your creditor. But equity financing means investors are on board for the long haul and must be consulted on all future decisions.

    On the flip side, debt financing can impact your company's credit rating. If you need to access funding in the future, a poor rating could affect your chances.  

     

    For more information about your options, why not talk to one of our experts? We want to help as many UK businesses grow and flourish as we can. So, get in touch with us today.


    BY Jessica Lambert

    15 October, 2021

    5MIN

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