Equity finance is where you sell a share of your business to somebody and then you use the proceeds of the sale in the business, to grow your business or to improve your working capital position.
Generally, the business is valuated first, terms and conditions are agreed amongst the new shareholders and then proceeds of the sale are the treated as a shareholder’s loan in the books in favour of the original shareholder. The loan is accompanied by the terms and price of the loan.
Raising finance through the sale of equity must only be done for strategic reasons, if the finance is used to manage working capital, generally more times than not you will be treating a symptom of an underlying problem with in the business. Strategic reasons to mention a few include; buying a competency into your business, using the funds to purchase assets that can grow throughput in the business and developing complementary products to deepen ties within the current customer base.