There are several possible types of equity financing or investment in business firms. Here are the most common.
1. Financing with Your Own Money and Money From Family and Friends
When you start your own business, you have to put some of your own money into it. You may have saved this money over the years or you may do something like take out a home equity loan. If you don't invest any of your own money, you will find it difficult to raise money. You can also ask your family and friends if they would like to invest in your business. They may be interested in your concept and may be the best source of equity financing besides your own money.
2. Small Business Investment Companies
The Small Business Administration (SBA) licenses and regulates a program called Small Business Investment Companies that provides venture capital to small businesses.
3. Angel Investors as a Source of Equity Financing
Angel investors can provide second-tier financing to businesses. They are wealthy groups or individuals who are looking for a high return on investment and are very picky about the businesses in which they invest.
4. Mezzanine Financing
Mezzanine financing is actually a hybrid form of financing that utilizes both debt and equity.
5. Venture Capital
If you get a venture capitalist interested in your business, you will give up a portion of your ownership and will probably have a representative of the venture capital firm on your Board of Directors. Venture capitalists are looking for high rates of return where they invest their money. Unless your business can offer them a high rate of return, they will probably not be interested.
6. Royalty Financing
Royalty financing is an equity investment in future sales of a product. It is a less formal process than angel or venture capital investing.