The 7 Major Types of Equity Financing

by Jim Smith on February 6, 2008 · 8 comments

There are two fundamental ways through which a business can be financed: debt financing and equity financing.

In debt financing, money is borrowed to be repaid over a fixed period of time, generally with interest. Debt financing may be short-term (repaid in full in less than one year) or long-term (repaid in full in more than one year). The lender derives no ownership interest in the business and the business has no other obligations except full repayment of the loan. Personal guarantees are normally required for small businesses and therefore personal credit history becomes very important.

In equity financing, money is exchanged for a share of ownership in the business. So the business raises funds without incurring debt and has no obligation to repay specific sums at specific milestones. The ownership interests of the principals may become diluted and their control can become eroded especially as additional investors are added.

There are several major types of equity investments for a small business:

1. An Equity Loan
This extends an ownership position to induce the loan or may be originally a note (debt) with an option to convert from debt to equity.
2. Seed Financing
Generally used by a business in the startup phase with no operating history. This kind of investment depends heavily on a business plan, the management team, a strong marketing plan, and sound financial analysis.
3. 1st Round Financing
For a company getting ready to go to market. Research and Development is most likely complete and the company is ready to grow. This loan typically takes the form of a convertible bond.
4. 2nd Round Financing
Company is achieving early stage maturity and is looking for a merger or acquisition, or is looking to go public (IPO)
5. Mezzanine Financing
Company is ready for an Initial Public Offering (IPO). Venture capital will be used to support the IPO.
6. Later Stage Financing
Company is now mature and is in need of funding for expansion either in facilities or product lines. Their financial state should be profitable or at least not losing money.
7. M & A Financing
Two companies combine resources and if one survives it is the acquirer. If both survive then there is a merger.

{ 8 comments… read them below or add one }

SACHIN JAIN March 17, 2009 at 11:09 am

i wantyed the live corporate examples with the above types to understand more better.
hope u provide the same soon…
thanks.

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Feng shui colors August 25, 2009 at 9:39 am

I keep listening to the news talk about getting free online grant applications so I have been searching around for the best site to get one.

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Feng shui colors September 3, 2009 at 1:52 am

my God, i thought you were going to chip in with some critical insight at the end there, not leave it with ?we leave it to you to decide?.

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Teijin April 18, 2010 at 10:54 pm

Interest costs on short-term debt and TIPS rise quickly in an inflationary environment and act as a constraint on the Fed?s loose monetary policies. Without Fed inflation control, rising debt costs will force tax increases or benefit program cuts to meet the higher interest expense. With short-term debt and TIPS, there is Fed incentive to control inflation and keep inflation expectations low.

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loans equity September 2, 2010 at 6:57 pm

As a Beginner, I’m always looking on-line for articles that can assist me get additional ahead.

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isaac ron September 19, 2010 at 12:32 pm

I’m always looking for the major types of equity financing. e.g venture capital firm, venture capital funds, and so on.

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MBUNWE EMMANUEL March 31, 2011 at 1:57 am

I am currentlycarrying out feasility Study on the need to establish a micro construction company to take care of the local housing needs of ordinary cameroonian. I wish some one could connect me to investors to invest in any form of financing.
Thanks.

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MBUNWE EMMANUEL March 31, 2011 at 2:00 am

my email address is atoke07YAhoo.com
Am located in Limbe,

Spectra Management Associates
New Town, Limbe-cameroon

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