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Equity finance is capital invested in a business in return for a share of ownership or an element of control of the business.

Unlike lenders, equity finance investors don't have the legal right to charge interest or to be repaid by a particular date. Instead they expect to make a gain on capital depending on the growth and profitability of the business.

Because equity investors share the risks your business faces, equity finance is often referred to as risk capital.

Is equity finance right for your business?

Different forms of equity finance suit different business situations.

It is likely to be most suitable where:

• the nature of a project does not suit bank loans or other forms of debt finance
• the business will not have enough cash to pay loan interest because it is needed for core activities or funding growth

Questions to ask yourself include:

• Are you prepared to give up a share in your business and some control? Investors expect to monitor progress and many seek involvement in significant decisions.
• Are you and your key people confident in the business' product/service? Does it have a unique selling point that singles it out?
• Do you have the drive to grow the business?
• What industry experience and knowledge does your management team have? Is there a variety of skills?

Due the risk to their funds, investors expect a higher potential return than for safer, more secure investments.

After considering the above, seek advice from a professional, eg your accountant, business adviser or .

There are various sources of equity finance, including:

1. Business angels

Business angels (BAs) are wealthy individuals who invest in high growth businesses in return for a share in the business. Some BAs invest on their own or as part of a network. BAs are often experienced entrepreneurs and in addition to money, they bring their own skills, knowledge and contacts to the company.  See business angels.

2. Venture capital

Venture capital is also known as private equity finance. Venture capitalists (VCs) look to invest larger sums of money than BAs in return for equity.

Venture capital is most often used for high-growth businesses destined for sale or flotation on the stock market. See venture capital.

3. Crowdfunding

Crowdfunding is where a number of people each invest, lend or contribute small amounts of money to your business or idea. This money is combined to help you reach your funding goal. Each individual that backs your idea will usually receive rewards or financial gain in return. See crowdfunding.

4. Enterprise Investment Scheme (EIS)

Some limited companies can raise funds under the EIS. The scheme applies to small companies carrying on a qualifying trade.

There are potential tax advantages for individuals who invest in such companies, such as:

• the buyer of the shares gets income tax relief on the cost of the shares
• Capital Gains Tax (CGT) on the sale of other assets can be deferred if the gain is reinvested into EIS shares

Certain conditions must be met for a company to be a qualifying company and for an investor to be eligible for tax relief - see HM Revenue & Customs (HMRC) .

5. Alternative Platform Finance Scheme

If your small business is struggling to access bank finance, there is now a new government scheme in which the UK's biggest banks will pass on details of any businesses they have rejected to three alternative finance providers. These are:

6. The stock market

Joining a public market or stock market is another route through which equity finance can be raised. A stock market listing can help companies access capital for growth and raise finance for further development - see London stock exchange: main market.

The equity gap is a term used to explain the gap a company experiences in funding as it moves up the ladder of different finance sources.

For example, some businesses require much greater funding than that which can be provided by business angels, but do not need the levels of funding venture capitalists would consider. The gap between these two finance situations is known as the equity gap.

Businesses in this situation may wish to approach private equity firms for help. These are organisations that invest and manage investments and they tend to focus on management buy-outs and buy-ins.

The government provides a multi-million pound equity finance scheme to close the equity gap by providing Enterprise Capital Funds (ECFs).

The ECF programme helps those looking to operate in the UK market to raise venture capital funds specifically targeting early-stage small businesses believed to have long-term growth potential - see British Business Bank .

Equity finance, the process of raising capital through the sale of shares in a business, can sometimes be more appropriate than other sources of finance, eg bank loans - but it can place different demands on you and your business.

Advantages of equity finance

Raising money for your business through equity finance can have many benefits, including:

• The funding is committed to your business and your intended projects. Investors only realise their investment if the business is doing well, eg through stock market flotation or a sale to new investors.
• You will not have to keep up with costs of servicing bank loans or debt finance, allowing you to use the capital for business activities.
• Outside investors expect the business to deliver value, helping you explore and execute growth ideas.
• Some business angels and venture capitalists can bring valuable skills, contacts and experience to your business. They can also assist with strategy and key decision making.
• Like you, investors have a vested interest in the business' success, ie its growth, profitability and increase in value.
• Investors are often prepared to provide follow-up funding as the business grows.

Disadvantages of equity finance

However, there are drawbacks of equity finance too. It's worth considering that:

• Raising equity finance is demanding, costly and time consuming, and may take management focus away from the core business activities.
• Potential investors will seek comprehensive background information on you and your business. They will look carefully at past results and forecasts and will probe the management team. However, many businesses find this process useful, regardless of whether or not any fundraising is successful.
• Depending on the investor, you will lose a certain amount of your power to make management decisions.
• You will have to invest management time to provide regular information for the investor to monitor.
• At first you will have a smaller share in the business - both as a percentage and in absolute monetary terms. However, your reduced share may become worth a lot more in absolute monetary terms if the investment leads to your business becoming more successful.
• There can be legal and regulatory issues to comply with when raising finance, eg when promoting investments.

For further information on the different ways to raise money for your business see business financing options: an overview.

Equity finance may not suit your business. For example, you may not feel happy about losing a degree of control, or the intended project may be too small to be an attractive investment opportunity.

Consider the following alternatives:

• Loans - there are many options available, from commercial mortgages secured against your business assets to short-term borrowing for periods of between three and five years.
• Overdrafts - overdrafts can be expensive but are a flexible form of borrowing. They're not especially suitable for long-term finance as they are repayable on demand. 
• Loans from family and friends - these can be a sound method of raising finance, but beware of potential damage to relationships if the money isn't repaid on time. 
• Additional funds - from you or your fellow partners/directors.
• Government 91香蕉黄色视频 - there are government 91香蕉黄色视频 schemes that may help your business as well as private sector initiatives. Search our business 91香蕉黄色视频 finder for grants, loans, expertise and advice for which your business may be eligible.
• Joint ventures - these can take many different forms. The term normally applies to the co-operation of two or more individuals or businesses in a specific enterprise rather than in a continuing relationship. 
• Credit cards - these are a quick way of raising finance and a flexible form of borrowing. However, unless you can manage your cards very carefully to avoid paying interest and other fees, they are not suitable for long-term finance. 

Mezzanine finance

Mezzanine funding combines elements of debt and equity finance and can provide access to bank funding that the business may not have otherwise been able to obtain. Under mezzanine funding a provider charges interest on the debt and also takes a share of profits when a company grows.

Mezzanine arrangements do not involve issuing shares to the lender and do not affect the value of the company's shares. Debts are usually repaid in a single payment and can be expensive, as the one-off repayment will involve a large sum of money which would affect businesses that have failed to fulfil their growth strategies.

Equity finance is a way of raising money from external investors in return for a share of your business.  There are two main providers of equity finance for private businesses - venture capitalists and business angels.

If you have a business with high-growth potential, but you are finding it difficult to obtain bank finance then equity finance may be an option for you - follow these tips:

Target the right equity investor for your business

Approach investors who are seeking to invest in a business that is at your stage of development. Research potential investors that are interested in your sector and want to invest the amount of finance that you require.

Prepare a realistic business plan

Provide details of how you are going to develop your business, when you are going to do it, who will be involved and how you will manage the finances. Demonstrate that you're fully aware of the marketplace that you're operating in and show financial projections to 91香蕉黄色视频 what you have said.

Value your business accurately

Potential investors will need to know what your business is worth before they consider investing in it. Calculate the value of your business' assets, complete a market comparison with similar businesses and analyse your potential cashflow to provide an accurate value of your business.

Prepare to pitch

Deliver an informative, relevant and engaging presentation. Anticipate the questions and concerns that investors may have and show the benefits of their involvement in your business. Investors will be interested in your personality too, so be enthusiastic and passionate about your business and its potential, without being unrealistic about its prospects.

Communicate effectively and honestly

Communicate clearly about what your business is, what it is trying to achieve, how much money is needed to make it a reality, and what you will deliver and when. Answer all questions that are directed at you and be prepared for probing questions.

Negotiate investment terms

If an investor is interested in collaborating with you, you can start negotiating key issues including respective responsibilities, growth targets, the investor's exit strategy and service contracts. You should also specify how the investment relationship will be managed and what involvement they'll have in the company.

For further advice, see secure equity investment.