Private equity financing allows businesses to tap sources of funds beyond the bank. The money is invested in a privately owned business structured similarly to equity partners where the investor takes an equity position in the company itself. The capital for private equity financing stems from investors and private individuals who wish to exchange their wealth for an increased return on investment. Many times the investor is capable of establishing requirements on the usage of their money after a negotiating process takes place. The funds for private equity financing are typically used for business startups, expansions and project funding. Today, the private equity financing market is a popular choice for businesses as it offers no limits on the amount of money invested and doesn’t call for minimum monthly payments.
Advantages of Private Equity Financing
Even when businesses are doing moderately well they can benefit from private equity financing to continue to attract customers and sales. Private equity financing has several advantages over the traditional lending option to meet these needs easily. While a bank would scrutinize your business from head to toe, including time in existence and operation incomes and expenses, private equity financing only examines your management team and growth potential. A bank will also call for all of your hard assets as collateral while private equity financing seeks ownership interest. Other perks of using private equity financing includes 1) investors who can commit to large amounts of funding for extended periods of time, 2) capability to collect enough funds to take public companies private, 3) are available when credit is tight. As an example, successful companies such as Facebook and Starbucks have used private equity financing.
Types of Private Equity Financing
There are four main types of private equity financing: leveraged buyout, venture capital, growth capital and mezzanine capital. Each type suits the needs of a business’s individual and unique needs. A leveraged buyout is essentially an acquisition of another company using a hefty amount of borrowed money. Venture capital is provided by investors for startup funding to companies who lack access to capital markets. Growth capital serves mature companies in need of capital for restructuring and entering new markets. Mezzanine capital strays from the former types of private equity financing in that it is a hybrid of debt and equity financing. Most often it is provided to the company quickly at an aggressive cost for expansions.
Stages of Private Equity Financing
Three main stages comprise private equity financing:
Venture Capital-$50,000 to $5m. This stage calls for development of products and business ideas. Market research begins and a strong business plan is later developed, followed by actual marketing.
Expansion Financing Stage-$5m-$50m. This stage of private equity financing tends to the needs of full scale production, expanding operating levels and assists a company to enter the public.
Acquisition Financing-$2m-$200m. Just as the name implies, this type of private equity financing allows a company to acquire another company with a hybrid of debt and equity.
Preparing for Private Equity Financing
In order to be awarded private equity financing a business must meet their investor’s criteria. An investor must assess the risk they are taking to finance your business to ensure they earn a higher rate of return than available in traditional stock markets. Before requesting private equity financing a business should have a thorough business plan, a reasonable marketing plan, a practical funding request as compared to company size, a solid financial history and skilled management.
Locating Private Equity Financing
Locating private equity financing can be a difficult task for a busy company. Fundraising is essentially quite different than sales and service. Adequate private equity financing works best when a business uses professional help. Professional help will shorten the request process and save a company a substantial amount of money by earning better capital. New Fund Managers is familiar with the private equity marketplace and is capable of finding potential private equity investors across a broad spectrum. Professionals will balance a business’s needs with the needs of an investor and assist the business throughout every step of the process.
