What Are the Two Forms of Equity Infusion?
When a company needs to raise capital, it may look at various options: debt, venture capital, mergers, private equity investment or public offerings. Some investors believe the best returns come from equity investments into promising business that are already established and in their growth phase. For these companies, they may infuse equity in exchange for a stake in the company. Other investors infuse hard money equity to support construction projects which have been approved for financing subject to the developer's initial capital. These are the two forms of equity infusion that investors seek.
In the construction industry, developers who have difficulty securing capital from investors for a construction loan may need an equity infusion of hard money as a requirement to the bank's capital. An investor's cash equity infusion enables the release of the construction funds to allow the development to begin. The hard-money equity infusion is generally more expensive than a debt loan with a lower interest rate. A developer considers it, nonetheless, since the hard money attracts additional cash equity infusion from other investors without the hard money costs. Combined, the less expensive cash equity infusion and the bank's loan can pay off the hard-money equity infusion.
If banks and investors are turning you down and you still believe that your construction project will be a profitable venture that you will be able to line up traditional financing for within a year and a half, once sales are under way, a hard-money equity infusion may be the answer. If you have buyers lined up for your project upon completion, a hard-money equity infusion may be right for you. Keep in mind that a hard-money investor will not hesitate to enter into foreclosure proceedings if you are not able to live up to his terms.
Some investors prefer companies that are already established and need funds to expand. They are willing to infuse equity into this type of company in exchange for a minority equity stake. To accept the equity infusion, the company may need to give up management control. The investment firm recoups its investment and return by acting in an advisory capacity in management, operations and financially to ensure the company's growth.
If you do accept the cash equity infusion from an investor for your established business, the investor benefits from a fee and the return on investment. The investor may need to convert his equity into liquidity for you for which he may charge a fee. He benefits from the return on his investment if your company merges, is sold, or goes public. In any of these exit strategies, the investor is paid out based on the agreed returns.