Almost anyone can be an investor in your business. But if you are looking for significant funding, you should approach venture capitalists and angel investors, as they typically have the means and resources. In addition to raising capital, the advantage of partnering with investors is that they can also help you grow the business. Often, it is in the investor's best interest for your business to succeed.
One disadvantage of equity financing is that you are giving up partial ownership of your company. Depending on the extent of their involvement, they may also have strong influence or control over business goals and decisions. Investors will also expect a return on their investment. They may put pressure on you to generate profits as soon as possible.
You need to be sure as a business owner. Once you take vk database on equity financing, it will no longer be your show.
Revenue-based financing
Another form of financing that is becoming very popular these days is revenue-based financing. Revenue-based financing is essentially a loan. But instead of having to pay fixed monthly installments, businesses pay back the money to lenders using a percentage of their actual revenue or sales.
For example, you take out a $1,000 loan at 12% interest that you agree to pay back using 5% of your monthly sales. Most revenue-based financing plans work with fixed rates and no compounding. So, you have to pay back $1,120 in total. Every month, you have to pay 5% of your sales. If you make $2,000 in sales in Month 1, you have to pay $100. If in Month 2, you only make $1,000, then you pay $50. This continues until you have paid back the total of $1,120.
So the higher your sales, the faster you can pay off your loan. But in case you have poor sales, you won't be under as much pressure to pay a defined amount, unlike traditional debt-based financing. Your loan repayments will be lower during lean months.
Such a repayment scheme seems more lenient compared to traditional loans. It is a reality that sales of companies serving specific markets and niches fluctuate. This gives companies a lot of flexibility and makes receiving external financing less daunting.
Plus, you wouldn't have to give up equity when you opt for revenue-based financing, as they are essentially loans. You'll still own your business.
Merchant Cash Advance
Through a merchant cash advance (MCA), a business can receive funds in exchange for future credit or debit card sales. It may seem quite similar to revenue-based financing, but technically, a merchant cash advance is not a loan. It is a “sale” of future card transactions. Institutions that offer MCA often work with payment processors to directly take a percentage of the merchant’s card sales until the amount has been recovered.
Among the key differences between MCAs and revenue-based financing are the qualification criteria. Revenue-based financing often requires healthy cash flow or a strong sales history. Companies that offer MCAs typically don't have that requirement. Companies with fluctuating sales records may find it easier to obtain an MCA than revenue-based financing. They can still enjoy the flexibility of having to repay using a percentage of their sales.