Equity finance
The number of private equity deals in Europe was up by 22% in 2024, with the UK venture capital market now making up over 5% of global investment, positioning Great Britain third largest in the VC world after China and the USA.
If these numbers have got you considering how your business can gain access to equity finance, read on. We’ve included helpful information like what equity finance is, the benefits, and how it matches up compared to debt financing.
What are the benefits of equity funding?
Equity finance can be a helpful way to grow your business, get access to strategic support, and become a bigger part of the global market. Here are some of the benefits.
No repayment obligations
Unlike a business loan, which usually needs to be repaid in monthly instalments with the addition of interest, equity finance does not need to be repaid. If you succeed, the investor succeeds, and they get a cut of revenue proportional to their ownership in the business. However, do be aware investors will expect to see their investment repaid through consistent growth in the business.
Access to strategic investors
Many investors are industry veterans, who may have turned their hands from running businesses to mentoring them. With equity finance could come a wealth of knowledge and experience, a true partner, and even a big helping of confidence in the form of someone else believing in your business as much as you do.
A focus on growth
Equity finance can include gaining a partner in business, one with a vested interest in the success of your company. Gaining equity finance often involves creating a business plan and demonstrating how you intend to grow your business in the upcoming years, ie. proving how you will gain the investor back their funds plus a return on their investment. This can create a growth mindset, which can help your business expand.
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Different types of equity financing options
Venture capital
There is a strong growth culture around venture capital, where many investors are aiming to get in early with a small or young business, where they can benefit the most once the exciting idea receives the attention they believe it deserves. VC companies are often willing to take risks – so if you feel you have the next big idea and your business is about to experience dramatic expansion, but you need the funding to make it happen, this may be the equity finance type for you.
Angel investors
While VC companies are often investment banks, financially rich corporations, or firms dedicated to raising large funds from a range of sources, angel investors tend to be a little more personal. Angel investors are people who use their own funds to invest in early stage businesses. An angel investor could be a high net worth individual who has invested in several businesses before and is now repurposing the cash, a family member, or even a group of angel investors working together to put forward the funds.
Private equity
Private equity essentially encompasses any investment that’s not an IPO (Initial Public Offering – see below), and can also symbolise an investment but with a more long-term view of profitability and growth. Venture capital could be considered a type of private equity, but so could a buyout (where you, the founder, sell most of your shares, essentially giving majority control to an investor), and growth equity, which sits between VC and private equity in the sense that the investor is hoping for strong growth, but not to the same fast paced expectations common with VC investments.
Initial Public Offering (IPO)
An IPO is when you make your business available to the public for investment by selling shares on the stock market. This can be an extensive process, which can involve working with investment banks, having your business underwritten, and opening up the type of information you publicly disclose. The value of your stock can go up or down depending on how the market responds to your business.
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What is equity finance?
Sell shares
Equity finance involves the selling of company shares. Essentially, you get a cash injection from an investor in return for ownership of a certain percentage of your company.
Diluted ownership
As a consequence, the amount of ownership you have in your business decreases. This can also end up decreasing your share of the profits and how much control you have over the business.
Flexibility
There are a range of different types of equity finance deals, including selling a small portion of your shares, or selling a controlling interest. You can work with banks, private investors, or corporations.
Who is business equity finance for?
Startups
New businesses often look towards equity finance to help them grow. Part of this can be that it can be harder to get approved for debt financing as a newer business with less of a trading history, as lenders often want to see a strong track record and solid credit history.
SMEs
Do you feel you are about to enter a growth cycle? Small to medium businesses often need funding to be able to reach the next level of business growth – whether that funding is for marketing strategies or to develop a new product line. Equity finance can help here.
Growing companies
Fast-growing businesses could find immense success in equity finance. VC companies are often looking for well performing businesses, or businesses with strong potential, to help them get to the next level of growth, potentially even ending in a stock market flotation.
Learn more about equity finance
How does equity financing work?
Initial consultation
Many businesses choose to use business brokers, who will hold an initial consultation and then find buyers. But whether you find buyers directly or use a broker, the process will usually start with a conversation to discuss suitability, percentages, and possible options.
Business valuation
You will then need to get a business valuation, which is when a professional determines the total value of your business. Once you have this number, you can assess what the value of your target percentage is.
Funding proposal
A funding proposal will aid investors in deciding whether or not to draw up contracts. The proposal outlines information about your business, including the services or products you deliver and why your business might be a good investment.
Partnership agreement
A partnership agreement outlines the final details of your contract. This would include how much the investor will pay, the terms and conditions of the purchase, and what percentage of the business will be transferred to them.
How is my business valued?
Initial business valuations are often calculated as a multiplier of profits after certain deductions, for instance, tax and accounting tools. Let’s say your business turns over £50,000 in profit each year and you run a niche services company. In this instance, your company could be valued at a 2-3x multiplier, equaling an approximate value of £100,000 to £150,000.
What types of businesses qualify for startup equity funding?
Most business types can qualify for equity finance. It’s more a case of whether or not equity finance might be a good idea for your business, and whether you can find an investor who might like to share ownership of your business with you. Businesses that get equity finance tend to be ones with high or fast growth potential.
Equity vs debt financing
Equity finance is an investment in your business. You sell a percentage of your business for a certain amount of money. Debt finance, on the other hand, is when you receive money or assets in exchange for repaying the funds, usually on an instalment basis, but not always, with the addition of interest.
An example of debt financing is a business loan, whereas an example of equity financing is private equity funding. Debt financing doesn’t require sacrificing ownership in your business, but it does require meeting your repayment obligations, which can put a strain on you if your business starts to struggle. However, this can be a positive if your business grows, as you won’t need to pay a percentage of your increased profits.
How to find equity investors for startups
Startups find investors from a range of sources, including some of the following.
VC companies
Venture capital companies are often looked to as a source of investment for high-growth startups. You can find VC companies by searching online and looking for established companies dedicated to helping startups grow.
Angel investors
Angel investors are more popular during the earlier stages of growth. There are many online platforms where you can connect with potential investors, or, you could consider reaching out to investors on LinkedIn.
Personal network
If you’ve been working in your industry for several years, you may already know a suitable investor. Consider if there is anyone you might like to work closely with, someone whose qualities and skills complement yours, and reach out to them to see if they’d be interested in investing.
Private equity companies
Like VC companies, many startups look towards private equity (PE) businesses for investment. However, PE companies often invest in more established businesses, so you may need to search for your perfect fit for a little longer.
Friends, family, or crowdfunding
You could try reaching out to friends, family, or the online community to see if anyone would like to invest. Crowdfunding platforms could help you find suitable investors online. Businesses who go down this route sometimes choose to offer an early purchase option.
What is equity capital funding?
Equity capital funding is another term for equity financing, which is when you sell a portion of your business to an investor for a lump sum, which you might use to further grow your business.
When might debt financing be more suitable than equity funding for businesses?
Debt financing might be more suitable if you’d prefer to retain full ownership of your business, if you’d like to hold onto control, or if you’d prefer not to share a percentage of your future profits. Debt financing can be easier to gain access to and there can be a shorter cycle between application and gaining the funds.
If you’re absolutely positive you can meet your repayment obligations, you’d like to establish a credit history as a business, and you want flexible options for how you will receive the funds (and for what), debt financing may be more suitable.
What types of debt financing are there?
Debt financing is a very flexible way of gaining funds. There are many different types of funding, below are just a few.
If you’d like to find out what your options may be, consider reaching out to our team. We can ascertain how much you may be eligible for and the type of funding you could benefit most from.
Auction finance
Want to buy a property at auction? You could get approved for auction finance before ever stepping foot in the auction house, meaning you’re able to bid, confident in the knowledge that your funding is sorted.
Bridging loan
A bridging loan is designed to bridge the gap between funds. Let’s say you’d like to buy a new company premises, but you need to wait to sell some of your shares to make the payment. In this instance, you could use a bridging loan to pay for the property now, then pay the bridging loan back in a year, once your sale has gone through.
Business loan
A business loan is when you get a cash lump injection, which you repay in instalments (usually on a monthly basis), with the addition of a percentage of the value of the loan as interest.
Short-term business loan
A short-term business loan is similar to a business loan for limited companies, but it is designed to be repaid within a short period, for instance, several months, rather than over a year.
Is it easier to get equity financing or debt financing?
It’s generally easier to get debt financing than equity financing, but each business is different so if there is a specific path you’d like to take, don’t let this discourage you.
Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.
It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.
Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.
