Let us start by understanding why your business needs to raise capital. There are basically three reasons due to which your business might require funds, which include launching a new product or a new service, expanding your operations in different parts of the world, or entering new markets that were previously unexplored. This is where equity financing comes into the picture. So, what is equity financing? Equity financing is a method to raise capital for business by selling your company’s stocks to investors who have faith that your venture will turn profitable in the future. Are you wondering why equity financing might be the right choice for your business? Here are two reasons why you should think about going ahead with it. Firstly, it will help you raise capital without worrying about debt. And secondly, it will enable you to on board investors whose large network of valuable connections and multiple years of experience will benefit your business in the long term. You will be surprised to know that Mankind Pharma raised a mindboggling INR. 4326 crores through their IPO in 2024. In this blog, we will discuss five ways through which a business can raise money. We will also talk about why equity financing might be the best choice for your business and in the last section we will look at the advantages and disadvantages of this fundraising tool.

How to Raise Capital for Business Using Equity Financing?

Do you know that a business can raise capital using equity financing by selling their shares to investors? Listed below are three types of stocks that investors can purchase:

  1. Common stock: Represents the portion of the company owned by an investor.
  2. Preferred stock: Shareholders receive fixed dividends and have more control over the assets of the company.
  3. Convertible preferred stock: Pays fixed dividends and can be converted into common shares at a later stage.

The initial investors who show interest in funding your business are angel investors and venture capitalists. They generally prefer convertible preferred stocks instead of common stocks because the former provides the opportunity of earning higher dividends. The best thing is that once the business crosses a certain threshold, it can raise more money by launching its IPO. Through this method, they can invite the public to invest their funds and become a part of their growth story.

Types of Equity Financing to Help Raise Capital for Business

We have understood what is equity financing and how it helps a business raise capital. Listed below are the different ways you can explore and select whatever suits you better.

1. Close networks
It is easy for your business to raise capital from friends, family members, and other relatives. Why? Because it is relatively simple to explain your business idea to them, provide details about your target customer base, share your relationship with stakeholders, and give a rough idea of how your company is expected to grow in the future. You don’t enjoy the same level of comfort while discussing important business metrics with a traditional financial institution. However, close networks have a downside, as these investors don’t have the required industry experience and skills to mitigate complex business challenges.  

2. Angel Investors
Angel investors are rich individuals who have a big amount of capital to invest in your business, allowing you to begin operations. Apart from assisting you to raise capital, they also share rich business insights, offer industry experience, and provide access to connections that play a critical role in your business’ growth story.

3.Venture Capitalists
Venture capitalists would be highly interested in funding your business if it has very high growth potential. But remember that you might have to sell a large portion of your company to get the required money from them. However, you will also benefit from their rich industry experience and get access to their industry contacts. A point of caution: Venture capitalists are involved in the day-to-day operations of your business that might sometimes create a point of contention between the two of you.

4. IPO
Ask yourself the following questions. Have you been doing business for a long time? Do you have a strong customer base? Are you trying to explore new ways to get funds to continue your business operations or expand to new territories? If the answer to most of them or all of them is yes, then IPO might be the best way to raise capital. But what is an IPO? After you launch an Initial Public Offering (IPO), you can list your company on the stock exchange where the public will be able to buy your stocks. One of the advantages of this fundraising strategy is that it reduces the amount of control investors, including venture capitalists and angel investors, have over your daily business operations. However, the disadvantage is that IPO takes somewhere around 6 to 9 months, which might not be a prudent choice for you if you want to raise capital immediately. Also, it is an expensive process and requires you to strictly adhere to the terms and conditions set by the regulatory authorities.

5. Crowdfunding
Crowdfunding is a new way to raise capital from the public. But how does it work? It all depends on the level of trust the common man has on your business. Keep in mind that you cannot expect a large amount of capital from a single lender in this case. However, rest assured that crowdfunding campaigns are highly successful if people resonate with the mission of your business. Usually, it is seen that companies that reduce their carbon footprint, promote cultural activities, and run societal welfare schemes under CSR usually get support from the public and raise millions of dollars.

Five Reasons Why Equity Financing is the Best Choice to Raise Capital for a Business

In the above section, we talked about the 5 ways through which a business can raise capital using equity financing. Now let us understand under what circumstances should you take this route:

1. If your business is in its early stage
When did you start your business? Did you establish it recently? If yes, then equity financing might be the right choice for you to raise capital for business and get money to buy machinery, rent out office space, or pay salaries to your employees. At this stage, venture capitalists and angel investors are your best bet as they are in constant search of startups or recently found companies that require funding. So, if your business has outperformed the industry benchmark, then do consider equity financing to raise funding.

2.If you are unable to receive loans from banks
Traditional financial institutions like banks are very selective when it comes to offering loans, as they must adhere to strict conditions imposed by regulatory authorities. Other reasons why banks might reject your loan request are if you have a very small customer base, your track record is not healthy, your cash flows are inconsistent, you already have taken a lot of debt from other lenders, you are operating in an industry which does not have glorious past returns, or the nature of your business is risky. If you think that the above-stated reasons are creating an obstacle for your business, try equity financing.

3. If what you want is more than just funds
Raising funds is undoubtedly one of the most essential elements of running a business. But there are other aspects that you must pay equal attention to. These include expert guidance from professionals who have multiple years of experience raising funds and running businesses. Professionals such as venture capitalists and angel investors understand the nitty gritty of various industries and how things run on the ground. Building long-lasting relationships with vendors, suppliers, and distributors is another aspect a business must devote its time and effort into. Because good relationships often translate into good discounts.

4. If you don’t want to incur debt
Does paying the interest every month take a toll on you? Well, this is not all bad because if you fail to make the payments, you might have to face legal consequences. Hence, to avoid such legal obligations, businesses sometimes consider diluting their equity a more viable option than incurring debt.

5. If you want a smooth sale
Are you searching for potential buyers to sell your company? The good news is that equity financing can help you meet your objective. How? You can raise capital for business through equity to pay off your debts, enhance the position of your company in the market, broaden your shareholder base, and increase the valuation of your organization to make it more attractive for potential buyers.  

Pros and Cons of Equity Financing

Now that we have a fair idea of why equity financing is a good choice to raise capital for business, it is important to check out its advantages and disadvantages.

Pros of Equity Financing  Cons of Equity Financing 
1. No financial obligation to repay the principal amount along with monthly interest  1. Give a portion of business ownership to the investor 
2. No additional fees to be paid to the investors  2. Share profits with shareholders 
3. Investors share their business expertise and provide access to critical contacts   3. Shareholders gain voting rights and control over certain business-critical functions 
4. Investors can keep pouring funds if they believe in the mission, vision, and value of the business and expect it to grow rapidly in the future  4. The founders face the risk of losing ownership rights of the business if investors hold more than 50% of the company’s total stocks 

 

Conclusion

Do you want to raise capital for business without attracting any monthly interest payments? If yes, then equity financing is your one-stop solution. This method helps you get funds by selling your company’s stakes to investors who see long-term value in your business. You can use these funds to expand your operations, open branches in new locations, pay salaries to employees and build good relationships with third parties.

How Can InCorp Advisory Help You?

At InCorp, our experts have years of experience raising funds through equity financing. We have a well-drafted process where we will help you prepare a successful pitch which will improve your chances of raising capital. We will also ensure that you are not stuck in the ever-growing complex web of regulations and assist you in getting listed on the stock exchanges through our big network of merchant bankers. To know more about our services and how we help raise capital for business through equity, you can contact us at
(+91) 77380 66622 or email us at info@incorpadvisory.in. 

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