1. Money

Types of Equity Financing for Small Business

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Equity is the ownership that both the business owner and other investors have in a company. Equity financing is raising money through investors for the small business. When a business owner uses equity financing, they are giving away part of their ownership interest in the business firm. Investors are actually buying a piece of the firm when they invest their money and they are looking for a return on their investment.

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.

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