Frequently asked questions

What is equity finance?

Equity finance involves raising capital by selling shares (equity) of your company to either existing shareholders or new investors who will participate in the company's profits. These individuals who acquire the shares become your company's shareholders.

Equity finance is often a favorable choice for new or small businesses that encounter challenges when seeking traditional loans.

How does equity financing work?

Equity financing operates by selling a company's stock in exchange for capital. The percentage of your company that is sold will be determined by the amount invested in the company and its valuation at the time of financing. As your business expands, the value of the investor's ownership stake in your company will also increase.

Businesses have the option to engage in multiple rounds of equity financing, involving various types of investors like business angels, crowdfunding platforms, or venture capitalists (VCs). Each round can bring in new capital and expertise to support your company's growth.

Debt vs. equity finance

Equity financing involves selling a portion of your business in exchange for capital, while debt financing entails borrowing money that you must repay with interest, often in the form of a loan.

Debt financing does not entail giving up any ownership or control of your business, unlike equity financing. However, equity financing is generally considered less risky because there is no obligation to repay the invested funds, which means no monthly repayments are required, and the capital received can be directed toward business growth.

Both debt financing and equity financing have their advantages, and businesses can benefit from either or both. Businesses seeking substantial capital for rapid growth and expansion often find equity financing more suitable. In contrast, those in need of quick funds to cover everyday expenses and operations may prefer debt financing. The choice between the two depends on the specific financial needs and growth goals of the business.

Why is debt financing cheaper than equity financing?

Debt financing is typically (though not universally) more cost-effective than equity financing because equity investors assume greater risk and, consequently, seek higher returns. Moreover, the interest paid on debt financing is often tax-deductible, whereas dividends paid to shareholders are not.

Furthermore, once the loan is fully repaid, your company will have no ongoing obligations to the lender. This characteristic makes debt financing a more economical option than equity financing for profitable companies.

Advantages of equity finance

• Poor Credit History: If your business has a less-than-ideal credit history, it can be challenging to secure debt financing. Equity financing doesn't depend on your creditworthiness, making it a more viable option.
• No Monthly Repayments: Unlike debt financing, equity financing doesn't impose monthly repayment obligations on your business. This can provide greater financial flexibility.
• Skills and Experience: Private investors in equity financing often bring valuable skills, experience, and an extensive network of contacts to your business. Their involvement can contribute to your company's growth and success.
• Motivated Investors: Equity investors have a vested interest in your business's success, as they share in its future profits. This motivation can lead to their willingness to provide ongoing funding and support, which can be advantageous for your business's long-term development.

Disadvantages of equity finance

• Ownership and Management Influence: Equity investors will hold a share of your business, and in some instances, they may exert influence on management decisions. This can potentially lead to conflicts over strategic choices.
• Profit Sharing: Sharing profits with investors is a common aspect of equity financing. However, this arrangement may be justified if you are benefiting from their valuable expertise and financial contributions, ultimately driving business growth.
• Time-Consuming Fundraising: Raising the necessary funds through equity financing can be a time-consuming process, involving activities like investor pitches, negotiations, and due diligence. It requires significant effort and attention to secure the right investors for your business.

The Midlands Engine Equity Fund (MEIF) explained

The Midlands Engine Equity Fund (MEIF) is a financial initiative that offers business-focused financing solutions, including small business loans, debt finance, proof of concept funding, and equity finance. This program is the result of a collaboration between the British Business Bank and 10 Local Enterprise Partnerships (LEPs) located in the West Midlands and South East Midlands regions.

MEIF has committed to providing over £250 million in investments to facilitate the growth of small and medium-sized enterprises (SMEs) in the Midlands. It aligns with the government's broader objective of enhancing the region's economy and supporting the development of smaller businesses during the period from 2017 to 2022.

What are the stages of equity financing?

In the course of their development, businesses often seek different types of investors to meet their evolving financial requirements. Here are some key options:

Family and Friends: In a friends and family round, funds are sourced from individuals who have personal connections with the founders, such as close friends and family members. This round typically relies on the trust and support of those who are already acquainted with the founders.

Various options are available for businesses to secure financing at different stages of their growth. Here are some key sources of investment:

Business Angels: Private individuals who invest their personal funds in startup or early-stage businesses in exchange for an equity stake.

Seed Enterprise Investment Scheme (SEIS): A government program aimed at securing funding for small, new businesses, offering tax advantages to investors.

Enterprise Investment Scheme (EIS): A government scheme designed to provide funding to small businesses and young companies, offering tax incentives to individual investors who purchase new shares.

Equity Crowdfunding: Funding is raised from a large group of individuals, often referred to as "the crowd."

Venture Capital: Venture capital funds invest substantial amounts of money in exchange for an equity stake in high-growth startups and early-stage businesses with significant long-term growth potential.

Venture Capital Trusts (VCTs): Listed companies approved by HMRC that invest in or lend money to unlisted companies.

Private Equity: Suitable for established private businesses, private equity funds provide capital in exchange for a significant ownership share.

Initial Public Offering (IPO): This marks the first time a company sells shares to the public, allowing it to become publicly traded on the stock market.

Each of these funding sources has its own characteristics, advantages, and requirements, making them suitable for businesses at different stages of development and with various financing needs.