Are you looking to raise money for your laundry business? If so, then you’ve probably come across the concept of equity financing – or selling shares of your company in exchange for capital.
Equity financing can be one of the more confusing strategies for a business owner, and, like other types of financing, it has its pros and cons. Perhaps the best way to look at equity financing is to compare it to its more common counterpart: debt financing.
Here is what you need to know about these options, and how equity financing applies to your laundromat:
What is equity financing?
In simple terms, equity financing is the sale of shares or ownership interest in your business – the “equity” part of the deal – in exchange for capital. Most equity financing deals take place between you – the business owner – and an investor.
“Equity financing is an alternative strategy for your business.”
Say you want to raise more money to upgrade your equipment. You can pitch your company to investors and offer them a small stake in your laundromat for a comparable amount of cash. They accept, and you get your money. They get paid by now having a financial investment in your business. You aren’t borrowing money so much as you are trading for it.
On a large scale, equity financing refers to initial public offerings, where businesses turn to the stock exchange as a way to raise capital. However, private businesses can use equity financing as well. Simply offering ownership stake to friends and family for a few thousand dollars counts.
Equity or debt financing?
Equity financing differs from debt financing. The latter is your average loan. You and your business borrow money from a lender with the expressed commitment to pay back that capital.
On the other hand, equity financing doesn’t have that same commitment. You don’t technically have to pay back the investor. You’ve already made your deal by leveraging your equity. They get paid either through stock returns or other future profits from your business. For entrepreneurs and small-business owners, equity financing can seem like a fair deal due to the deferred costs.
Even so, both have their pros and cons. Here are the big ones:
Pros of debt financing:
- More control – You retain your full ownership.
- Flexibility – You can choose the right loan terms for your business.
- Short-term – Once you pay back your loan, your lender-business relationship is over.
Cons of debt financing:
- Loan terms – Once you sign that agreement, you have to pay back your loan in the established amount of time or face higher interest rates.
- Too much debt – Too much debt can be a bad thing, especially for a small business. It can restrict cash flow and turn off investors.
Pros and Cons of Equity Financing:
- Less risk – Without taking on debt, equity financing can be less risky.
- Networking – Teaming up with investors can lead to future business opportunities.
- Cash flow – Without debt, businesses have increased cash flow.
- Bigger price – Leveraging equity may be too great a price to pay for some business owners.
- Time – Locating the right investor often takes longer than finding a viable loan.
- Influence – Investors will then have a greater say in your day-to-day operations.
How does equity financing apply to your business? By offering a potential strategy contrary to the traditional loan. Depending on your current economic situation and your motivations, turning to investors as a way to raise capital could be the better option. However, keep in mind the pros and cons of each method moving forward. Sometimes, the standard loan is the right way to grow your laundromat.