For fund-raising there are various types of equity financing, it is recognized as a most well known method of financing for an organization. The organization saves a great amount of money on the interest by not choosing debt financing. Numerous profitable associations can get equity finance effectively. Keeping in mind the different forms of equity financing along with appropriate planning the equity financing, the business or startup companies can guarantee the growth without diluting its majority equity stake. Going ahead the associations with higher potential will keep on finding the better sources of equity financiers.
Top 10 – Best Types of Equity Financing:
Here we are going to list down the best and important types of equity financing for small business, startups, large companies as well as well-established companies. This would give the greater ideas and best approaches when you are thinking towards equity finance.
1. Crowd Funding:
Individuals are investing into the startups companies or organizations since they have faith in their ideas and expect higher returns in near future. Crowd funding involves approaching to various individuals and convincing them to fund into the organization with small amount of contribution. Then it is decided that total funds / cash gathered from the individuals have been received or not. Now days, there are various websites where you can showcase your ideas, strategies and business plan to collect funds from individuals instead of approaching them personally.
2. Venture Capital Firms:
These venture capital firms are specialists in investing into the organizations that are relied upon to develop at a quick pace and can possibly list on the stock trades in future. The investment is additionally named as private equity finance. Basically these types of equity financing firms buy a bigger stake in the organization when compared with angel investors.
In other words, these firms are a limited liability partnership represents considerable authority in fund-raising to invest more in innovations. Venture capital firm is one of the types of equity financing for large companies as well as innovation startup companies. Firms for example: General Electric, Intel, Sun Microsystems are known for raising funds as a corporate ventures to new innovative startup organizations.
The Government of India legally sanctioned the operations of investment in November, 1988. The Department of Economic Affairs (Ministry of Finance), the Securities and Exchange Board of India, and the Central Board of Direct Taxes are the three controllers.
3. Angel Investors:
Individuals or investors who purchase equity in startup companies or small business are known as angel financial investors. Angel investors are rich persons who put their cash in startups or companies that can possibly produce higher returns in future. They provide funds to the organization by acquiring an equity stake in it. Typically such investors are companions or colleagues of the business visionary. This types of equity financing for startup are useful as they also bring their learning, skills and experience to the business that helps the organization in long run. In any case, finding such investors is difficult and troublesome task. In India there is an Indian Angel Network who contributes equity for startup companies.
4. Corporate Investors:
Many built up organizations buy equity in more innovation or startup or privately owned businesses. These types of equity financing are also known as strategic partners, corporate partners, corporate investors or strategic investors. Such types of investors are well known for creating a network of businesses and organizations.
5. Institutional Investors:
Institutional investors like: insurance firms, public funds, pension funds, establishments, mutual funds, etc. having vast amount of cash, are the significant types of equity financing for small business or private companies. In India, before 1990s, the Development Financial Institutions (DFIs) were recognized as a lenders of long term equity financing.
6. Renting Instead of Purchasing:
Here we don’t buy stores or assets, instead of it get stores, assets or equipment’s on lease, in this way staying away from huge round of funding for business growth. Moneylenders or financial institutions are the main source of financing. This is one the internal arrangement type of equity financing within the organization. This requires huge corporation and commitments from business partners.
7. Mezzanine Financing:
Mezzanine financing is a hybrid form of financing or you can say it’s a mixture of debt and equity finance. The investor offers you a loan and, if all goes well, the organization just payback the loan with interest as per agreement terms. Assuming, the organization does not succeed, the moneylender or this form of equity financing investor has the privilege to transfer their loan amount to an equity stake of an organization. This type of equity financing assures the moneylender from the truth that most private companies do fail on it.
8. Retain Earnings:
Firms can acquire equity financing by retaining income or profits of the businesses for raising funds for organizational growth. Along these lines the organization isn’t required to search for different investors of equity finance to solve their cash arrangement. The business can raise equity by issuing bonus shares to its existing shareholders.
9. Financing from Family and Friends:
For entrepreneurs who have solid family ties or social networks or communities, it might be a well approach to contacts for raising funds by offering equity stake. This form of equity financing is moderately risky. As it is an essential for the entrepreneur to take its own decisions rather than companion or relative. It may lead to huge loss in the middle of the path way.
10. Initial Public Offering:
A well-established organization can acquire equity finance by launching the Initial Public Offering (IPO) of their company. With an IPO offer, the organization can raise funds by offering its equity stake to public. Apart from individuals, financial institutional, foreign investors can invest into the company’s IPO. This is one of the types of equity financing for large companies where a well known company or a firm or a brand can easily raise the funds from IPO. The organization uses this method of equity finance when it has effectively utilized different types of equity finance. A drawback of an IPO is that, it’s an expensive and tedious process of equity financing.
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» e-Learning Chapter 3: Advantages and Disadvantages of Debt Financing
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