Is Equity Financing Right for You?

10/01/23

Equity financing provided by an angel investor or venture capital fund (think “Shark Tank”) carries no scheduled monthly payments, and provides extra working capital that can be used to grow and market your business. An advantage is that the investor takes the risk – if your company fails, there is no obligation to repay.

However, to offset that risk, you will be granting your potential investor an ownership interest in your company, and a voice in the decision-making process. Profits will be shared, and, should you want to disengage, buying out an investor can be expensive, typically costing a great deal more than the original investment.

Equity financing is a mixed bag of benefit and cost. If you choose the right investor, they could provide expertise in running the company, establish business connections and offer valuable advice; however, the loss of control over the operation, the duty to inform investors of significant events, and sharing business profits can prove costly in the long run.

A final thought

Remember, the equity you have in your company is not only your initial investment, but also includes retained earnings from profitable years of operations. You could potentially create additional equity and free up funds for growth internally, through expense reduction and by minimizing the level of owner distributions to simply cover the income tax obligation. That level of discipline could quickly bolster the capitalization of your company, providing the foundation for growth, either type of financing, and ultimately reward you many times over!