Equity funding
WHAT IS EQUITY FUNDING
Equity funding is a term that is used for the investment made in the mutual fund shares, life insurance policies and other such financial instruments. Requirement of finance for the small businesses is very important and many times, these business units obtain finance by means of equity funding. There are many sources of equity funding in the market and these sources have helped many small business enterprises in registering good growth for themselves. Though it seems quite easy that any small business or any other business unit can fulfill financial requirements, it is not so. There are many related aspects that need to be understood.
SOME RELATED ASPECTS
Before leveraging financial requirements and growth by means of equity funding, a person should be well aware of different aspects. When any business unit goes for equity funding, it has to sell some part of its equity . As has been observed, there are only few chances where a person gets his equity back from investor. This calls for utmost attention from the businessperson while distributing the equity in the business. Also, investors generally do not like to loose the equity they have gained by means of equity funding. The businessperson should have long term goals in his mind while going for equity funding. The other aspect is regarding the valuations used in the equity . If any person has invested $500000 in business enterprises and sells 50% equity, he would be owner of $250000 only then and in future; this is the total equity that can be availed. The above amount of $500000 has to be understood with respect to net worth of the company and not just investments made in plant, machinery and raw materials etc. It is the businessperson and investor that determine the worth of the company . If the businessperson thinks that business unit is doing well and in future, it can do better, he can easily go for expensive valuations. However, it is up to investor whether he agrees to such valuations or not.Basically, the motive behind equity funding is to target the additional funds for fulfilling the objectives of the company. It is not necessary that only business units resort to equity funding . There are some equity funding sources that provide assistance to the educational institutions . For example, ibank is a source in New Zealand that provides equity funding for all the education centers that are taking part in different types of community based early childhood services. For this source, the objectives of equity funding comprises reducing the educational disparities that are there among different communities in New Zealand and all the barriers that obstruct flow of finance to all the educational institutions that are underrepresented.
One important aspect regarding equity funding is to find a suitable source. It can be the case that a person may face some problems in finding source of equity finding. In such cases, the performance of the company would be a deciding factor . This is because if the company is not registering good growth, it may become very difficult for it to find a suitable equity fund partner. The availability of money for the equity fund may increase where the stock market is not doing well and the interest rates in the market are also low. In such cases, many angel investors and venture capital sources may come forward for making investment by means of equity funding. It has been generally seen that amount required under equity funding also becomes decisive factor sometimes. This is because in case of small needs, the competition is more and investors do not like to make small investments . For example, if any business unit in United Kingdom wishes to obtain funds by means of equity funding and the investment amount is between 1-5 million pound sterling, it may face competition from similar other firms. There are many business firms in United Kingdom that wishes to get investments of same amount by equity funding.
It is advised that before resorting to equity funding, the businessperson or promoter of business should be prepared for providing stake as well as control over business. The stake acquired is generally from 20-40%. It can also be the case that equity fund appoints a non-executive director in the board of members of the company.
PRIVATE EQUITY FUNDING
Private equity funding is a term that has to be discussed while discussing equity funding. If carefully seen, private equity funding is similar to venture capital. In case of private equity funding, the ownership of the company is calculated by taking into considerations all the assets but after the adjustment of liabilities has been made. Private equity funding is resorted to in such companies where there are no shareholders and one or more promoters control all the interests of the company. The name private equity funding is given to such process, as the interests of the company are not traded publicly in the stock market.Let us discuss about the manner of investment by means of private equity funding. Money in invested in a business unit from a private equity fund to fulfill the capital needs of concerned business unit.The private equity fund that has invested in the business unit becomes the general partner of such unit and thus, gains some rights to manage the business affairs of the unit . This is the reason why we said earlier that private equity funding is similar to venture capital fund .
When any private equity fund makes investment in any business unit, it becomes limited partner.One basic difference between the private equity funding and venture capital fund is that in case of private equity funding, investment is generally made for the purpose of restructuring of the business unit that are already existing and the period of this restructure is generally from 3 to 7 years . Apart from above, there are also some cases where a private equity fund goes for purchasing equity of a company that is publicly traded in the stock market. In such cases, after the funds have been invested, the company has to be de-listed from the stock exchange.
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