Commercial Finance – Equity Financing

Growing a business is somewhat akin to growing a garden. You need plenty of sunlight. In the case of a business, that sunlight comes in the form of the green stuff known as cold, hard cash. Finding that cash can be a challenge for many businesses. One option is something known as equity financing.



Do you own a business? If so, you’ve already undertaken equity financing. How so? Equity financing is the act of looking to the owners of the business for financing help. This is true whether we are talking about a sole proprietor, partners in a partnership, shareholders in a corporation or members in a limited liability company. Alas, this is rarely the type of equity financing most businesses must undertake.



Let’s say you have a business that has a product that is going to revolutionize the world wide web. At least that is your vision. You don’t have much in the way of recognizable revenues, so your local commercial banker has to go to the hospital after laughing non-stop for hours at your loan application. You and the other owners are pretty much flat broke. Are you doomed or is there another alternative? There is.



The concept of equity financing in commercial finance usually refers not to the owners kicking in more money, but third party investors doing this. Who are those investors? There are two traditional groups – venture capitalists and angel investors.



Venture capital investors are always looking for the next big thing, particularly when it is technology oriented. If your business fits what they are after, they will provide you with installments of financing, known as "rounds". In exchange, they want a chunk of the equity in your business. Their goal is to either sell the business or take it public and make a bundle.



Angel investors are similar to venture capitalists, but a bit less aggressive. Angels tend to be one or a few investors. They will contribute money to your cause in the form of a loan t hat is secured by a chunk of equity. The loan terms are usually fairly brutal. If you don’t pay back the loan, they take the equity in the business. If you do pay it back, then they don’t get any equity.



Would you jump off a boat into a pool of Great White Sharks while they were feeding without any protection? I doubt it. Well, the same goes for equity financing with angel investors or venture capitalists. You absolutely must hire an attorney familiar with the field to represent you in negotiations with either party. If not, there is a very good chance you will end up with a deal you will come to really regret down the road. The investors are in it to make as much money as they can. That means driving the hardest bargain possible. Make sure you have someone to push back just as hard.



Thomas Ajava writes about commercial financing loan topics and issues for CommercialFinancingLoans.com.