Fundraising is available with numerous options in the market today like rewards based, equity-based, family, and friends, or other investor based funding.
Choosing the best depends on the following:
1. Stage, size, and industry of your business.
2. Your ideal time frame.
3. The amount you wish to raise.
4. Short term and long term goals for your company.
In this article we talk about investor based funding, and what you need to select, among equity, loan or convertible debt.
Equity-based investor funding:
No repayment schedule, hence a very popular form of finance. The investors receive a stake for the money they invest now. Based on what your business is worth, and the amount of money invested. The investors will receive a percentage of stock in your business. They will get a fair amount when business goes public or sells.
Sustaining a business which needs sizable infusion before it starts giving profit; equity investment is the best choice. No collateral yet a great idea, equity investment is your best option. When bootstrapping isn’t the option equity is the way forward. Great vision and plan for growth equity is the key to success.
Points to consider before going for equity investment:
Investors anticipate a bigger return on equity investment.
Equity investors are in high demand.
It is a time-consuming process.
Have equity investors who will stay with you for a long time.
Loan based funding:
Borrow money now to pay it back later, with a predefined interest rate. Fundraising through loans requires repayment through a predetermined rate of interest and time frame. Collateral is required. In the event of non-repayment of loans, it is sold to recover it.When the amount is less, a loan is your best option.
When the amount is less, a loan is your best option. The best option when you are in urgent need of capital. Taking a loan is the best choice for tangible goods. Better the collateral faster the loan approval.
Combining the benefits of debt and equity you get convertible debt. When you get a business loan, it is either repaid or changed into a share in the company. Investors are given incentive by converting their debt into equity, through a discount or warrant. Interest rates are fixed, for those who opt not to convert.
Start-ups not ready for a valuation can go for this option. It has a dual benefit for investors.