Equity Financing

Equity financing is the third method of business funding we want to consider. With equity financing, another person (or group) contributes a specific amount of capital to help grow the business. In return, the investor gets part ownership of the business, and he/she shares the risks as well as the profits of the venture. If your goal is to attract an investor, having a good business plan is extremely important.

Let’s say you need $10,000 to start a car repair business. However, you don’t like the idea of borrowing money. What can you do? One possibility is to offer somebody a percentage of ownership of the business in return for the start-up capital. Perhaps you find a friend who also likes the car repair business. This friend reads your business plan and believes you have a fantastic idea. So your friend invests $8,000 in return for 30% of your company. You raise the other $2,000 through asset financing and together you launch the business. If you earn $12,000 net profit the first year, $4,000 of those profits would go to your friend and $8,000 will go to you. Or, you might both decide to invest all the profit back into the business, open a second shop, and take the venture to another level.

As you continue working together and building this business, you vision grows. After a few years, you are so successful that you and your friend decide you want to open a chain of 10 repair shops. You estimate it’s going to take $2 million to reach your goals. Where can you get that kind of money?

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