English / ქართული / русский /
Davit Aslanishvili

Annotation.Entrepreneurship and business play a special role in economic life, with small and medium-sized businesses being the central link. This study describes the methods and ways of financing small and medium business activities at the current stage and their characteristics.

Keywords: IPO, Small Business Investment Companies, Angel Investors,  Mezzanine Financing, Royalty financing, Venture Capital, Crowdfunding 

The main problem for small and medium business owners in the modern economy is to finance their own business, which is due to the relatively high risk of their business activities compared to large corporations.

There are a number of possible sources of funding for small business financing that differ from one another. It is also accompanied by a variety of government and private business approaches and funding formats.There are also grants made by government, corporations, and other entities, as well as equity capital from SBICs and angel investors. There aren’t a one size fits all, but there is often is a size that will fit you and your small business. Small business finance includes both debt financing and equity financing. Several methods exist to garner both types of financing for your business. Some business owners take out bank loans, use credit cards, or use loans from family and friends. Those methods are a form of small business finance called debt financing. Other businesses turn to organizations or individuals that specialize in funding startups or growing businesses. This is called equity financing. Equity financing is using other people's money to finance businesses. Those people are the company's investors. Equity financing is a method of small business finance that consists of gathering funds from investors to finance your business. Equity financing involves raising money by offering portions of your company, called shares, to investors. When a business owner uses equity financing, they are selling part of their ownership interest in their business.

 Here are seven types of equity financing for growing companies:

  1. Initial Public Offering

An Initial Public Offering (IPO) takes place when a company that has decided to "go public" offers up initial shares on a publicly-traded market such as the London Stock Exchange or the New York Stock Exchange. "Going public" is the term used to describe transitioning to a publicly-traded company.  This type of funding requires developing the offering in compliance with the guidelines established by the Regulatory bodies, such as Central Banks or Securities and Exchange Commission (SEC)in the USA.  It is required that the IPO should be registered and approved. If approved, the Regulatory Body gives the business a listing date. The listing date is when the shares will become available on the market they are going to be traded on.

Once this is done (or even before), the firm needs to start working to ensure investors are aware of and become interested in, the shares. This is accomplished by publishing a prospectus and beginning a campaign to attract investors.  Going public is usually reserved for small businesses that are regional or national in nature.

  2. Small Business Investment Companies

There are structures, which can be classified as the Small Business Administration (SBA). Such structures issue licenses and regulates a program called Small Business Investment Companies (SBIC) that provides venture capital financing to small businesses. Venture capital firms pool investors' money in order to invest in start-up, possibly high-risk business firms. These investors may be wealthy individuals, private pension funds, investment companies, and others. The Small Business Investment Company (SBIC) Program was developed to provide venture capital to small businesses. Those within SBIC are private, profit-seeking investment companies licensed and regulated by the SBA. These companies can be a pivotal source of equity capital for small businesses. The SBIC supplies a list of investment companies that participate in the program to small businesses.

   3. Angel Investors for Equity (long term) Financing

Angel investors provide a type of equity financing for startups and for small and medium size companies. Angel investors are typically wealthy individuals who are interested in investing in a company and provide start-up or first-round funding. In return for an individual investing in your company, you give that investor a percentage of ownership in your company. Alternatively, the angel investor may prefer convertible debt.

Angel investors typically don't make really large investments so their percentage of ownership may not be large. Often, angel investors are interested in having input on how the company is operated. You, as a business founder and owner, can very often benefit from the expertise angel investors have to offer.

Angel investors generally need to be accredited investors. These are investors who are high net worth individuals who have certain qualifications and income.

Some angel investor groups actively seek early-stage companies in which to invest and they provide technical and operational knowledge to startup ventures. These angel investors may provide the second round of funding for growing companies after the initial start-up funding.

Angel investors become shareholders in the small business. They receive a piece of the action in return not only for their money but for their knowledge in helping a small business get off the ground or grow. 

   4. Mezzanine Financing

Mezzanine financing is a combined form of financing that utilizes both debt and equity. It's called mezzanine financing because intermediate-sized businesses are usually interested in this type of financing. The financing has an intermediate risk level and lies between lower-risk debt and higher-risk equity financing. The lender makes a loan and, if all goes well, the company pays the loan back under negotiated terms.

With mezzanine capital, the lender can set terms such as financial performance requirements for funding the company. Examples of terms could be a high operating cash flow ratio (ability to pay off current debts) or a high shareholder equity ratio (value for shareholders after debts are paid).

One benefit for borrowers is that mezzanine capital can present more value than a traditional lender would be comfortable granting. Another is that since mezzanine debt is a hybrid form of equity and debt, it is considered by accountants to be equity on the balance sheet. It can bridge the gap between the point at which a company no longer qualifies for start-up debt financing and the point where venture capitalists would be interested in financing the firm.

This gives borrowers a lower debt-to-equity ratio, which in turn can attract investors because a low debt-to-equity ratio is usually an indication of less risk. 

   5. Venture Capital

Venture capital financing is a competitive method of funding since a venture capital firm may have any number of firms and projects competing for money at a given point in time.

Venture capital firms provide funding in exchange for ownership, or shares, of your business. Venture capitalists are looking for high rates of return when they invest their money in a start-up small business.They usually have many competing businesses from which to choose. Unlike angel investors, venture capital firms don't use personal funds for investing in startups. These firms consist of a group of professional investors who pool money to invest in start-ups or growing firms. Venture capital firms may also want a seat on your board of directors. Some venture capitalists see a board seat as a form of managing an investment. Many venture capital firms have transitioned to a mentoring approach to assist with investment growth. If you are considering venture capitalists, look for firms that are interested in your firm's line of business and helping it prosper.

   6. Royalty financing

Royalty financing, or revenue-based financing, is an equity investment in future sales of a product. Royalty financing differs from angel investors and venture capitalists because you have to be making sales before approval. 

Investors will expect to begin receiving payments immediately as a result of the agreements made with the lender. Royalty financers provide upfront cash for business expenses in return for a percentage of the revenue received from the product.

   7. Crowdfunding

Crowdfunding, a relatively new source of money for small businesses, is the process of making a request to the "crowd" for money to launch your product or service. The request is usually made on the internet through popular crowdfunding platforms like Kickstarter and Indiegogo. Crowdfunding is especially good for startups and their early-stage funding.

Equity crowdfunding is selling shares of your company to the crowd as opposed to using a platform where you pre-sale your product to the crowd. The owners of a privately-held business raise money through selling a portion of their ownership interest, or equity, to investors in the crowd in this way. There is less than half the number of publicly-traded companies there were in the 1990s. Through equity crowdfunding, companies can remain private but raise funds from the public. 


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