Equity financing is money acquired from the small business owners themselves or from other investors.
Stockholders purchasing shares in a corporation, for instance, create equity financing, as do angel investors who provide funding. Small business owners may invest their own funds into their businesses, funds gleaned from inheritance, savings, or even the sale of personal assets which then serves as equity financing for the business.
Besides contributing to a healthy balance sheet, making a personal investment that serves as equity financing in a business is often necessary to attract other investors and/or lenders. If you, as the small business owner, are not prepared to put any of your personal funds into the business, what does that say to anyone else who might be thinking of investing in the business - or that you're asking for a business loan? Investors and lenders like to see an equity financing contribution of 25 to 50 percent.
Generally, investors and lenders take your equity financing contribution as a sign of your commitment to the business. They want to see that you are willing to share the risks, as well as the rewards.
While there is a great deal of talk about angel investors as sources of equity financing, the main sources of equity financing for small businesses continue to be family and friends.
