11 Company Financing Options for Your Business in Singapore
Know more about company financing options fueling businesses’ growth in Singapore, including loans, grants, LOC, Invoice Financing, Equity Financing etc.
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Equity financing is the process by which a company can raise capital without having to repay debt. It usually takes the form of selling shares of ownership in the business to investors. Investors who purchase the shares gain an ownership stake in exchange. In the future, they might receive returns through dividends or capital gains along with the company's growth.
The source of equity financing can vary, from close friends and family to public offerings like an initial public offering (IPO). It is commonly used by companies to fund short-term needs or long-term projects.
Different from debt financing, where the company borrows money and must repay it with interest, equity financing involves selling a portion of the company’s ownership in exchange for cash. It might have an influence on the business decision, depending on their ownership format and stake.
Equity financing is a way for companies to raise capital by selling shares, sharing ownership, and avoiding debt repayment, making the cost of obtaining capital lower. Therefore, equity financing is very valuable for startups and growing businesses seeking flexible funding.
The process of equity financing can vary depending on the company’s stage, investor type, and the kind of equity offered, but generally follows the key steps below:
Having equity financing is an important business decision. Companies should assess their financial needs, growth goals, and market conditions to determine the right time and terms for raising equity capital.
Before finalizing the deal, the company and investors will negotiate key terms. The mutually agreed-upon terms, such as types of shares, investor rights, and protections, should be officially documented in a Term Sheet.
The company issues shares to investors, who become part-owners. Depending on the investor, this can be passive ownership or active involvement with managerial input and decision-making influence.
Formal agreements such as Share Subscription Agreements and Shareholders Agreements are drafted to outline commitments, rights, and obligations. The company updates regulatory bodies to reflect new ownership structures.
The company uses the raised capital to finance operations, growth, or specific projects. Investors may provide ongoing support, expertise, and governance depending on their involvement level.
Individuals who invest their own money in early-stage businesses in exchange for equity. They often provide mentorship and have a more patient approach to returns compared to traditional lenders.
Professional investment firms that fund high-growth startups and emerging companies. VCs typically invest large sums and expect significant equity stakes and active involvement in strategic decisions.
Raising capital from a large number of investors via online platforms, allowing businesses to sell shares to the general public or targeted investors. It’s regulated and often used by early-stage companies to access smaller investments from many backers.
The process of a private company listing its shares on a public stock exchange for the first time. IPOs provide access to a broad investor base and substantial capital, often marking a company’s transition to public ownership.
Investments made by private equity firms in private or public companies, often involving buyouts or significant ownership stakes. Private equity investors usually seek to improve company value through operational changes and later exit at a profit.
A hybrid of debt and equity financing, where the lender can convert debt into equity if the loan is not repaid. It’s used when traditional loans are not available or insufficient, providing a safety net for lenders while supporting company growth.
Licensed private investment firms that provide equity and debt capital to small businesses, often backed by government programs. They pool investor money to invest in high-risk startups or growing companies.
The stage of a company significantly influences the type of equity financing it should pursue, as different investors and funding mechanisms align with the company’s maturity, risk profile, and capital needs.
Equity financing and debt financing are two primary methods companies use to raise capital, but they differ fundamentally in structure and implications.
Equity financing involves selling ownership shares in the company to investors, who then share in profits and may influence business decisions; it carries no obligation to repay the invested funds but dilutes the founders’ ownership and control. In contrast, debt financing means borrowing money that must be repaid over time with interest, without giving up ownership or control, but it imposes fixed repayment obligations that can strain cash flow.
The choice between them depends on factors like the company’s cash flow, growth stage, willingness to share control, and access to funding sources.
Companies do not have to repay the capital or make regular interest payments, reducing financial pressure, especially important for startups or pre-revenue businesses.
Unlike loans, equity financing does not increase debt or require collateral, improving the company’s balance sheet and creditworthiness.
Investors such as angel investors or venture capitalists often bring valuable business experience, strategic guidance, and industry contacts that can help the company grow.
Equity financing can provide larger amounts of funds compared to debt, enabling rapid expansion and scaling.
Reducing the debt-to-equity ratio can enhance the company’s credit profile and attractiveness to future investors.
Selling shares means founders give up a portion of ownership and may need to consult investors on key decisions, potentially slowing decision-making or leading to conflicts.
Investors expect returns through dividends or capital gains, reducing the founder’s share of future profits.
Equity is often more expensive because investors take on greater risk and expect higher returns.
Raising equity involves extensive negotiations, due diligence, legal documentation, and can divert management focus from core operations.
Compared to lenders, finding suitable equity investors can be more challenging, especially for early-stage or risky ventures.
Suppose a startup is valued at $10 million post-money and seeks to raise $2 million in a Series A funding round. The investors agree to invest this $2 million in exchange for equity in the company.
Pre-money valuation: $8 million (company value before the new investment)
Investment amount: $2 million
Post-money valuation: $10 million ($8M + $2M)
To calculate the investor’s ownership percentage:
Investor ownership = Investment / Post-money valuation= 2 million / 10 million = 20%
This means the investors receive 20% ownership of the company in exchange for their $2 million investment, while the existing shareholders (founders, employees, previous investors) retain the remaining 80%. If the company later sells for $50 million, the investors’ 20% stake would be worth $10 million, representing a 5x return on their initial investment.
To determine whether your business needs equity financing or debt financing, consider several key factors aligned with your company’s goals, financial situation, and growth stage:
If your business has stable and predictable cash flow, debt financing may be suitable since you can manage regular loan repayments with interest. However, if cash flow is uncertain or you want to avoid repayment pressure, equity financing is better because it involves no mandatory repayments.
If maintaining full ownership and control is a priority, debt financing allows you to retain 100% ownership since lenders do not get equity. Equity financing dilutes ownership because you sell shares to investors who may also influence business decisions.
Early-stage or startup companies often find it difficult to qualify for debt due to a lack of assets or credit history, so equity financing is more accessible. Established businesses with assets and revenue can more easily secure debt financing.
Debt financing requires repayment with interest, which can be tax-deductible, while equity financing does not require repayments but means sharing future profits and possibly paying dividends to investors.
Debt financing is generally quicker and less complex to obtain, especially if you have a good relationship with lenders. Equity financing takes longer due to investor negotiations, due diligence, and legal processes.
Many companies use a combination of both to balance risk and growth needs. Choose debt financing if you have steady cash flow, want to retain control, and can manage repayments. Opt for equity financing if you need flexible capital without repayment obligations, are willing to share ownership, and seek investor expertise to support growth.
In Singapore, equity financing is primarily regulated under the Securities and Futures Act (SFA) 2001, which governs the offer and issuance of securities, including shares, to investors.
Companies raising equity capital must comply with the SFA’s prospectus requirements unless their offers qualify for specific exemptions, such as raising less than S$5 million within 12 months, offers to no more than 50 persons, or offers made solely to accredited or institutional investors. These exemptions allow smaller or private fundraising rounds to proceed without the full prospectus process.
The Monetary Authority of Singapore (MAS) is the key regulatory body overseeing securities markets and fund management activities. Equity investors, including venture capital and private equity firms, are subject to regulatory frameworks that ensure transparency and investor protection. Fund managers often require licensing under MAS unless they qualify for exemptions, especially if managing assets above certain thresholds.
Singapore encourages a transparent and business-friendly regulatory environment, balancing investor protection with ease of capital raising. Companies issuing preference shares must detail the rights attached in their constitution, and investor rights such as board representation or pre-emption rights are typically negotiated in investment agreements.
Additionally, equity crowdfunding platforms and offers involving digital tokens fall under MAS regulation and require compliance with securities laws, including licensing for platform operators.
Overall, Singapore’s equity financing regulation emphasizes transparency, investor protection, and streamlined compliance, fostering a trusted and efficient capital-raising environment for companies and investors alike.
Besides the equity financing methods, which sometimes might be challenging for businesses to obtain, there are more financing options that fuel companies’ growth in the market. For instance, companies would also consider debt financing to ensure greater control within the company. Choco Up’s revenue-based financing product, Upstart, helps businesses to gain up to 1M USD with a flexible repayment arrangement, without diluting the ownership of the business. Different from other debt financing options, our Upstart solution is a growth-based debt financing solution; In other words, how fast the businesses grow affects the repayment timeline for Choco Up, making the growth of your business our first priority in both parties. We consider ourselves a growth partner rather than simply providing a financial solution to our clients, as we always strive for a win-win situation for both our clients and ourselves.
Want to know more about Choco Up’s support for businesses? Contact us now for more details!
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