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Business owners who obtain outside equity – whether from family, friends or institutional investors – quickly learn money has strings attached.
Most outside equity providers want to get repaid over a reasonable period of time and at a very good rate of return. In exchange for capital, they obtain a piece of the company, thereby becoming business partners.
For a growing business, the advantages of this kind of capital are numerous. Equity significantly improves a company’s balance sheet and provides resources for hiring marketing staff, developing new products, purchasing equipment and other needs.
But there are other important benefits, too. A strong cash position will make the company look better to suppliers, customers and lenders, which can result in better credit terms and improved borrowing power.
Equity also reduces the risk of failure because, unlike a loan, funds do not need to be paid back on a fixed schedule, and there are no interest payments. Other factors being equal, a company that is financed with a lot of equity has a lower risk of failure.
Family and friends are usually the first place business owners go when looking for equity investment.
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