Finding and attaining affordable financing is an ongoing challenge for most businesses within the United States. Debt financing through bond issues and business loans is a common source of capital for established businesses. Equity financing offers flexibility for companies in a high growth phase. Equity financing is the process of obtaining funding from individual investors or equity firms in exchange for an ownership stake in the company. American companies have the opportunity to secure equity financing by obtaining a partner, acquiring funds from friends or family, working with a venture capital firm or angel investor, or by completing an initial public offering.

Partnership or Friends and Family

When a business is in its startup phase or is about to experience rapid growth, acquiring financing is a must. Because most methods of debt financing, such as bank or government loans, are not available in the early stages of business, it is common for business owners to seek out an individual or group of individuals to create a partnership. These individuals provide the funding necessary to meet the company's growing needs. In exchange for funding, the business owner offers an ownership stake to each partner based on how much he is able or willing to contribute. Often, partners in the company have some say in business operations and may hold a management or other authoritative position in the business.

Business owners who need financing but do not want to give up control over the business's day-to-day operations may reach out to friends or family members to obtain financing. An ownership stake in the business is offered as it would be with a partnership, but individuals are considered a silent partner in the business.

Venture Capital or Angel Investors

Privately held companies that have a high potential for exponential growth and a strong track record of profitability may be able to obtain equity financing through venture capital. This type of financing is common in the technology sector and is typically offered in much larger sums than what is acquired through partnerships or investments from friends and family. In return for financing, venture capital firms are given an ownership stake in the business, as well as a high level of control over daily operations. Venture capitalists insert experienced individuals from their firms into the receiving company to ensure the business is running in a profitable, efficient manner. Most venture capital deals are short term, but they can take a substantial amount of time to secure.

Angel investors are individuals or firms similar to venture capitalists who invest in growing companies, but are more focused on mission-driven businesses in their specific region. They are also more available to companies in earlier stages of operations and can provide financing in lower amounts than venture capitalists.

Initial Public Offering

For established businesses, an initial public offering (IPO) is a common source of equity financing. Through an IPO, companies raise capital by offering equity ownership shares to the public. Often, an IPO offers different classes of shares for purchase to institutions and individual investors, including common and preferred stock. This method of obtaining financing can be costly and time consuming and is typically done only after other sources of equity financing have been used.

  1. What is the best form of equity financing for a start-up company?

    Learn the equity financing options available to small business, and understand the best equity options for companies during ... Read Answer >>
  2. What resources are available to an entrepreneur to raise capital?

    Learn how entrepreneurs can use various resources to raise capital and how each is beneficial throughout the different phases ... Read Answer >>
  3. What is finance?

    Finance is the study of how money is managed and the process of acquiring needed funds. Personal finance, corporate finance ... Read Answer >>
  4. Where does venture capital come from?

    Obtaining funding from venture capitalists is the way to go for those who have great ideas with potential for becoming lucrative ... Read Answer >>
  5. How is venture capital regulated by the government?

    Learn about some of the ways in which the U.S. government and the Securities and Exchange Commission regulate venture capital. Read Answer >>
Related Articles
  1. Small Business

    Small Business Financing: Debt Or Equity?

    There are two sources of financing for small businesses: debt and equity financing. This article explains both.
  2. Small Business

    The Basics Of Financing A Business

    From debt financing to equity financing, there are numerous ways to fund a business startup. But which is the best?
  3. Small Business

    Does Your Startup Need Venture Capital Money?

    Venture capital funding provides capital to grow a business. However, entrepreneurs will also lose some control over business decisions.
  4. Investing

    4 Ways Millennials Can Buy Private Businesses

    Buying private businesses is a good way to have greater control over your investments while increasing your income and avoiding the fluctuations of the market.
  5. Small Business

    Choose The Best Way To Fund Your Startup: Are Loans Or Equity Right For You?

    Which is better for a startup - debt or equity? Here are the advantages, challenges, and criteria.
  6. Investing

    What Does Finance Cover?

    Finance is the study of banking, leverage, credit, capital markets, money and investments, along with how they are used by individuals and companies.
  7. Investing

    How Social Venture Capital Is Changing the World

    Learn what social venture capital is and the ways in which it differs from traditional venture capital. Identify two leading social venture capital firms.
  8. Small Business

    Series B Financing to Expand Business

    Businesses acquire Series B financing from private equity investors or venture capitalists after two earlier rounds of financing.
  9. Small Business

    Mezzanine Financing

    Learn about this alternative method of financing companies use to finance expansion.
  10. Investing

    The Difference Between Finance And Economics

    Finance and economics are often taught as separate subjects, but they are interrelated disciplines that influence one another in many ways.
  1. Financing

    The act of providing funds for business activities, making purchases ...
  2. Venture Capitalist

    A venture capitalist is an investor who provides capital to startup ...
  3. Finance

    The science that describes the management, creation and study ...
  4. Series A Financing

    The first round of financing undergone for a new business venture ...
  5. Alphabet Rounds

    The early rounds of funding for a startup company, which get ...
  6. Venture Capital Funds

    An investment fund that manages money from investors seeking ...
Hot Definitions
  1. Earnings Per Share - EPS

    Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share of common stock.
  2. Trustee

    A person or firm that holds or administers property or assets for the benefit of a third party. A trustee may be appointed ...
  3. Gross Domestic Product - GDP

    GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  4. Debt/Equity Ratio

    The D/E ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity.
  5. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
Trading Center