Equity is a common way for businesses to get the money they need, but it’s important businesses understand how it works and if it’s a suitable funding option.
Every business is different, so what works for one might not necessarily work for another. Equity finance has many advantages as it helps businesses to grow more quickly, enabling them to gain a better competitive advantage.
In essence, equity financing involves selling a stake in a business in return for a cash investment. Investors will buy shares in the company in order to make money from their sale in the future at an increased value. Unlike debt, there aren’t repayment obligations so more capital stays in your business.
Plus, the investors will only make a return on their investment if the company is successful, so it is in their interest to help the business to reach its full potential.
Intrigued? Many businesses decide to take this route due to its advantages but that hasn’t stopped myths around equity finance surfacing.
Here are some of the common myths debunked and what it actually means in reality.
Myth one: You are giving away part of your business
Yes, you are selling a part of it in return for investment but that isn’t the end of the story. Equity finance also brings expertise from people who want to help to successfully grow the value of your business.
Myth two: I will lose control of my business
There will be consent matters and input from the business’ board, but for most investors a minority stake is preferred. This means they are backing you to run the day-to-day of your business while they share sector knowledge and experience from other investments to help you take control of your growth plans. Think of an investor more as a strategic partner that can act as your sounding board.
Myth three: Investors only have ‘short-term’ goals
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Equity isn’t forever, investors will want an exit strategy but it depends on the type of investor you decide to go with. If you work with a patient investor and make sure business goals are aligned from the beginning you can develop a long-term growth plan together.
Myth four: There aren’t a lot of equity providers in Wales
The most recent equity report from shows that the is one of the top three most active venture capitalists in the 海角视频. Through Angels Invest Wales there is a network connecting Welsh businesses with over 250 business angels.
What is the difference between equity and debt finance?
External finance normally falls into the categories of either debt or equity, while the two are often combined they are very different methods of financing. Here is a brief explainer of each:
Equity finance
Equity finance is the process of raising capital by selling shares in your business. It carries no repayment obligation but investors expect to make a future return on their investment, as they buy a stake in your business. This also means that an equity investor might ask for a board seat so they have input into the overall direction of the business. There are many pros to equity finance, but if you are in a hurry to raise money for your business this might not be the right option, as it can take time to find the right investor.
Debt finance
Debt finance essentially involves borrowing a lump sum, which you then pay back over time plus an agreed-upon amount of interest, typically in monthly instalments. A lender may ask the borrower to pledge an asset as security for the loan, and if you can't repay, the lender may claim the asset to get the money back. However, a lender has no ownership and isn't involved in business decisions. Start-up businesses may also struggle to secure debt finance but it is usually more straightforward to secure compared with equity finance.
Myth five: You have to choose either debt or equity
Many businesses opt for a mix of debt and equity as a finance solution, at the Development Bank of Wales we do a lot of deals with elements of both. It allows businesses to balance the needs of the company with the benefits each one brings.
Myth six: Equity investors are only interested in tech companies
While there are many equity providers who focus on the tech sector and start-ups, there are others who are active across all sectors and types of business. Equity finance can be used to help established businesses from more traditional backgrounds like manufacturing, engineering and retail, as well as help management teams looking to buy a business owner out.
Myth seven: It’s too risky for businesses
Any deal can carry risk and increasing the level of debt in your company through loans also carries its own risks. This is why in any equity deal you need to go through a robust due diligence process and aim to find the right investor fit for your business. This can mean looking beyond the money and focusing on the added value and compatibility of the investor.
Myth eight: Equity is more expensive than debt
Let’s think of the big picture. Equity finance will create more value in the long term as ultimately the growth of the business is enabled. End return to shareholders can be much higher than if they simply took on debt and without re-investing capital into the growth of the business.
To find out how you can expand your business’ horizons through equity, visit .