About 90% of startups fail in their first year of operation. One of the key reasons behind this massive failure is the lack of sufficient capital.
Your business can get capital from many sources. One of these is equity financing. This is where an investor offers funds in exchange for shares or ownership of the startup.
Why would you accept equity funding? Here are the five benefits of equity capital for your startup.
1. Access Management Expertise and Business Contacts
The company’s management stands to benefit from equity financiers. The new financiers may want to play an active role in the startup’s management. This can inject fresh skills into the business, especially if the investors are seasoned business managers.
Experienced business leaders usually have accumulated invaluable contacts and networks. Also, they know other sources of capital that your business may need. This is great assistance that’ll push your business to new success.
2. Provides Funding
The primary benefit of equity financing is that it provides much-needed capital. Your startup may not qualify for loans from financial institutions. At the same time, the available loans can’t finance all business operations.
Private equity helps the business without adding unnecessary risks.
Since you don’t have to pay any interest to the equity investors, you can use the funds to fund your operations. Lack of debt repayment worries allows the business to upscale its operations.
3. Aids in Long-Term Planning
Developing and implementing long-term plans becomes easier if you work with equity investors. This isn’t usually possible when you get financing from a bank. The bank will usually expect you to start interest payments as soon as possible.
Financial institutions are more concerned about interest payments than profits. On the other hand, equity financiers will only benefit if your business succeeds. Consequently, they’ll be willing to accept short-term losses in exchange for long-term profits.
4. Attract Alternative Sources of Finance
Receiving funding from a well-known investor, such as Impact Capital, is like getting a stamp of approval. Other lending institutions will now have confidence in your business.
The new partners may also have a better credit rating. They may have borrowed and successfully paid back large amounts of sums in the past. This financial reputation can be one of your strong qualifications when you seek a loan from a bank.
Selling your company’s shares for public equity at a stock exchange also comes with many benefits. That’s because people automatically associate success with any company that is listed on a major stock exchange.
5. Has a Lower Risk
There’s a lower risk of bankruptcy when you use equity investment instead of a loan. When you take a loan, the prospect of creditors auctioning your business is always there.
The risk means that you may have to downsize so as to improve your profits and repay the debt. Creditors can also force you to restructure your business if they get a court order. These are things that you won’t expect from equity investors.
Reap the Benefits of Equity Capital
Equity capital is a popular source of funds for startups. Your business gets much-needed funds but doesn’t have to worry about debt payments. This means that you can focus on growing your business.
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