Know your options – equity finance

Know your options – equity finance

Equity investment is a way to finance many different stages of the business journey.

equity finance

Whether starting out, or experiencing a high-growth phase, equity finance forms an important part of finance arrangements for businesses and usually brings broader expertise with it.

Equity financing is the raising of capital through the sale of shares in a business. Equity can be sold to third-party investors with no existing stake in the business. Alternatively, equity financing can be raised solely from existing shareholders, through something called a “rights issue”.

Some investors take a minority stake, whilst others are interested only in a majority stake. Whichever is the case in a specific scenario, however, investors’ interests are aligned with the business, meaning all are on board for the growth journey.

Early stage equity finance

At an early stage, businesses will need long-term backing to fund the business through to revenue and profit. This could be through business angels and/or venture capital and is commonly in different rounds with different parties.

In the shorter term, equity investment can support an aggressive growth strategy.

Blending different types of equity finance

A business may have many different types of equity finance. Founding shareholders will usually have put some initial equity into the business. Friends or family may also have ‘invested’ in the early stage of a business’s journey. Business angels may then take an equity stake. Venture capital (VC) investors, (also known as venture capitalists), corporate venture capitalists or private equity (PE) investors tend to be an option at the growth phase.

Financial institutions or the wider public may also invest in equity through a listing of the company’s shares. The public may also acquire equity stakes through equity crowdfunding platforms.

In reality, this is not simple – there are many equity finance options at each stage in your journey, especially when a business is doing well. Business angels, for instance, may invest at many stages in the business’s growth.

As it progresses, a company’s shareholder register will be a mix of investors who have taken stakes at different stages of its journey.

equity finance what shareholders may expectWhat shareholders may expect in return

Unlike debt providers or lenders, (see know your options – debt), equity investors do not have rights to interest, or to have their capital repaid by a certain date.

Shareholders’ return is usually paid in dividends or realised through capital growth. Both are dependent on the business’s growth in profitability, and its ability to generate cash. Because of the risk to their returns, equity investors will expect a higher return than debt providers. Where a project requires longer-term investment than conventional debt offers, equity will be the most suitable form of finance.

There is also a hybrid of debt and equity finance – mezzanine. Mezzanine and growth capital loans are covered under growth finance.

Your finance journey

You can find out more about the advantages of different types of equity finance by clicking here. The interactive journey tool within this website will show you what equity and debt options may be available to a business like yours. Or if you’d like to know more about a specific type of equity finance, then click here to view your finance options.

Restart your journey Equity vs debt
Main advantages of equity finance

Equity finance can be the right option for many businesses – especially those seeking to grow quickly.

Find out more about the main advantages to a business of different types of equity finance.

 

Other considerations - equity investment

There are important things a business owner like you should think about when considering equity investment, including the cost of finance, impact on their share of the business and the time required to secure this kind of investment.

Find out more about what businesses need to consider

Helping hand from HMRC

When taking on equity, businesses should make potential investors aware of four HMRC schemes – Seed Enterprise Investment Scheme (SEIS), Enterprise Investment Scheme (EIS), Venture Capital Trust (VCT) Scheme and Social Investment Tax Relief (SITR)

These encourage investment in unlisted growth companies, through a range of tax reliefs against investment in new shares.

Find more about the HMRC schemes.

 

Equitable questions for an equitable outcome

Before seeking equity finance, you should consider these five questions:

  1. How much is required?
  2. What is it for?
  3. How long will the funds be needed for?
  4. What other skills does the business need?
  5. What level of control do existing shareholders want to retain?

The answers can be incorporated in a comprehensive business plan, which should incorporate realistic financial projections, a detailed marketing plan and, crucially, what the investor can expect in return.

Networking and making use of any suitable contacts is critical to finding appropriate potential investors. Many corporate finance advisers will have networks of contacts in the business angel, VC and PE communities. Engaging an adviser can help the process.

Many private investors focus on specific industry sectors or geographical areas. The following associations may help you to track down investors, networks or networking opportunities:

The British Business Bank and equity

The British Business Bank is encouraging diversity and competition in equity investment markets for smaller UK businesses by committing capital to investment funds.

Find out more about the British Business Bank’s programmes to support equity finance.

Together on the journey

Access to the right kind of finance at every stage in your growth journey enables businesses like yours to invest, grow and create jobs. That’s why the British Business Bank and ICAEW’s Corporate Finance Faculty, and partner organisations representing finance and business, have created the business finance guide.

> Find out more about our partners

The Business Finance Guide

Download our comprehensive guide in PDF format allowing you to print and read at your leisure.

DOWNLOAD GUIDE