Understanding the pros and cons of equity financing is as important as it is for the other means of funding. Equity Financing is where you work with an investor to get your business off the ground in exchange for ownership or part of your business. They will normally agree to fund your start-up or inject money into your business in exchange for a percentage of the business or the profits.
Equity financing includes options like;
- Angel investors.
- Venture capital investors.
- Incubators or accelerators.
It’s very important to weigh the options in equity financing before signing any agreements and making any type of arrangements with investors. Much as getting money under less strict terms might seem a juicy option, have it at the back of your mind that the investor will take a big chunk of your hard work.
Having said that, lets dive into…
Pros and cons of equity financing.
Pros of equity financing.
- No monthly payments to make.
With equity financing, there are no monthly financial commitments which could mean more freedom. You will then have to focus on your business as opposed to debt financing where the monthly payment pressure will be an issue. In most cases, you will only make payments after the business is profitable.
- No need for credit scores. You will not have to depend on your credit scores to get funding using equity funding.
- In some cases you will have the opportunity to learn from your partners and also benefit from informal partnerships.
Cons of equity financing.
- It’s not easy to come by. Since angel investors don’t have a physical location, you will probably need to have strong connections to find them and also will need to depend on online platforms to find them.
- Be ready to give up control of your organization. It’s a big price to pay especially after all the hard work. It will always look like a small percentage in the beginning but will eventually become significant when the business grows.
- There is a possibility of conflict since you will be working with others who may not have fully understood your vision.
- The process of raising equity financing can be time consuming.