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What is Equity Funding and Should You Go After It?

small business equity funding

Many small to medium businesses as they progress need help with their financing from time to time.   Many will consider equity funding.

This type of funding can become quite complex and should only be entered into under the guidance of experts.   These include your small business accountant and investment advisors for example.   This type of financing revolves are the sale of common equity but is not just restricted to that this.  It can also include the sale of preferred stocks or equity units.

The new business that is growing will focus on a different caliber of investor compared to the seasoned business.   It is common for the younger businesses to be appealing to venture capitalists and this will include the angel investors.   These particular investors would rather have convertible preferred shares because they have better potential for the investors which includes some protection as well for the downside.   Companies that have become well grounded and established often consider going public with the offerings of common equity shares.  This also leaves the door open for then to approach secondary equity financing if needed in the future.

Equity financing often includes the general public who is interested in buying shares of the company.   In order to protect them there are rules and regulations set in place for the business that is pursuing this type of financing.  One of these revolves around the company having to submit a prospectus.   This contains all the pertinent information about the company so the potential investor can make an informed decision.

Making the decision to opt for equity funding is a big one.  You should have an experienced small business accountant looking after your financial records for you.  This expert will be able to walk you through your financials so you have a very clear picture as to what your financial strengths are, as well as what financial needs may exist.

It also depends on the type of business you are in as well, whether equity financing is your best option.  Technology companies are viewed in a different light compared to consumer goods entities.   One of the reasons being is because a successful technology company has the ability to grow much faster than many of the consumer goods companies.  This makes the technology based companies a little more inviting for investment.

Consumer based businesses do have the chance to capitalize on credit rather than giving up their equity in the beginning.   So there are good financing options available to all size and types of businesses.

 

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Sam Seidman, CPA, CA, LPA
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Email: sam@torontoaccountant.ca

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