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Equity finance comes in various forms and is principally provided by venture capitalists and business angels.
Overview of Equity Finance:
Equity Finance may be defined as a method that is used in order to generate share capital resources from external investors, with the share capital being provided in lieu of company shares.
Equity finance is normally invested with the assumption that medium to long term profits may be made.
Equity Finance is likely to be most suitable where:
- The nature of a project deters debt providers, e.g. banks
- The business will not have enough cash to pay loan interest because it is needed for core activities or funding growth
Sources of Equity Finance
- Finance for Business offers flexible finance solutions such as loans and equity finance for businesses with viable business plans that are unable to get support from commercial banks and investors.
- The Capital for Enterprise Fund is a $75 million equity fund. It brings together $50 million of government money with $25 million from major banks and provides longer-term capital to companies who have exhausted their traditional borrowing capacity. The scheme is part of the Government's Real help initiative.
- Enterprise Investment Scheme: Some limited companies can raise funds under the Enterprise Investment Scheme (EIS). The scheme applies to small companies carrying on a qualifying trade & provides potential tax advantages for individuals who invest in such companies.
- Venture capital is most often used for high-growth businesses destined for sale or flotation on the stock market.
- Business angels can offer investment, particularly in the early or growth stages of development, in return for equity.
Equity Finance Risks
There is a lot of risk involved; this can be said based on the fact that the payment of the investors is highly dependent on the success of the company. Having no growth or profit would result in an adverse effect on the payment possibilities of investors. This is the reason why equity finance is also referred to as risk capital.