The constant evolution of the global market-which heralded the birth of fierce competitions and often healthy rivalries- has propelled the need for start-ups and growing businesses to delve into the idea of equity investments. Equity investments enable start-ups to raise capital for the company, especially as they neither have any financial records nor possess the collateral to secure any loans from a bank. Thus, equity investments would enable such start-ups to thrive in the fast-expanding and continuously evolving global economy.
Investors are also looking to invest and become a part of growing businesses. However, it carries a bit of risk. The growing business could bring profitable returns or crash, resulting in a loss. To prevent this, they employ the use of market analytics tools like Carta, Robinhood, and Fairmint. While others only provide the simple service of risk management in equity investments, Fairmint enables business owners to sell equity right from their website.
Before we move any further, it is crucial to talk about the concept of Equity Investment.
The Concept of Equity Investment
Equity financing can be defined as the process through which a business raises capital by selling equity. The sale of such equity effectively grants buyers a percentage of ownership in return for funds needed by the company, either in the long-term or short-term. It also represents the total sum of money returned to shareholders when the company’s assets are liquidated and where the whole company’s debt has been paid.
While the concept of “equity financing” is applied majorly to public companies that have been listed on the stock exchange, it also applies to the financing of private companies. However, it could be challenging for growing businesses to have access to equity investments.
Benefits of Equity Investments for Growing Businesses
Small businesses are paramount to the economy. However, they need all the help they can get to grow. Equity investment is the best way to do this. Suppose your business is in a position to grow. In that case, equity investments can provide the necessary resources to help you achieve your growth ambitions. It can generate much-needed funds to enter new markets, refinance, and invest in R&D, to mention a few.
Below are a few benefits of equity investments for growing businesses.
The primary benefit of equity investments is the increase in the value of the initial amount invested in the business. You have less risk using equity investment to finance your business because you don’t have to take loans or use debt financing to attain the necessary funds needed for a company’s growth. This helps to increase the capital base without accumulating credit problems. On the other hand, debt financing could incur severe penalties for start-ups if they fail to meet up on the payments. Whereas equity financing offers no risk.
Moreover, there can also be follow-up funding. By investing in your business, investors become part-owners; as such, they are usually concerned about the state of their investment and willing to provide additional funding to make the company grow and develop.
The capital increase is reflected in the company’s growth through new products, increased market equity, and company strategy change.
The burden of loans can be very detrimental to the growth of the business. One of the main advantages of equity investments is that the start-up owner does not have to be burdened by the repayment of loans. The business owner secures lesser risks through equity investments. Start-ups can benefit greatly from this because the first few months may not experience positive cash flows.
This issue of no debt repayment is also essential during the initial periods of the start-up because, as mentioned above, start-ups do not qualify for bank loans. Also, investors usually do not expect immediate returns on their investments, making it an altogether safer route for start-ups.
Expertise, Skills, and Network
Apart from the money that equity investment brings in, growing businesses can also benefit from the investors’ knowledge, expertise, and network.
They may be good sources of advice and contacts. This is why growing businesses usually look for investors with sector and management experience that their business can benefit from. Given the right investor, a business can achieve its growth ambitions in a short time. They are willing to work as hard as possible to maximize the company’s growth. Their vital guidance, experience, and business acumen can help a business achieve its visions and be the best it can be.
With the exponential increase of the digital economy in the 21st century, it is obvious that the relationship between customers and corporations has experienced a paradigm shift. Thus, there is no longer passive participation amongst customers. Customers are becoming more involved with companies they patronize. Growing businesses can utilize that to raise funds for their business. Using the above mentioned tools start-ups can create an exciting avenue to turn their clients into investors in their companies. Growing businesses can financially align themselves with the community, allowing clients who believe in them to invest and earn as the company grows.