Private equity financing is money that is invested in a privately held business in exchange for partial ownership of the business.
The invested funds might come from private individuals or institutional investors. Regardless of where it comes from, there are many individuals and businesses that are ready and willing to invest in a make-sense business.
The goal of the investment is to earn more of a rate-of-return than could be earned otherwise.
It can be like venture capital or angel investors where the investors can choose to invest startup funding, but usually the business has been operating for a while and needs money for expansion.
Private equity financing often involves large amounts of capital even though there is no set limit of how low or high the investment can be.
Despite the fluid nature of this type of financing, there are criteria a business will have to meet in order to obtain this type of business funding.
The investors will look for assurances that their money will be used wisely and in a way that increases the likelihood that the investment will bring higher returns than would be expected if giving business loans.
The investor will balance the risk of investment loss again the possibility of investment gains and then make a decision as to whether the risk is manageable and makes sense.
The investor will look to see if the entrepreneur assumes more risk exposure than the equity partners or investors, what stage is the business currently in a startup or well established business looking to expand, how much experience does the management have in the industry, and how large is the investment request and how does it compare to the size of the business.
The investor will also look to see if there is a quality business plan with realistic goals and projections, to see if there is a marketing plan complete, look to see what is the company’s history including its historical financial and market performance, and to see if the business is willing to accept investor restrictions placed on the investment.
The last question may seem obvious at first glance, but it’s on the list for a reason. Private equity investors can set their own unique requirements and restrictions for business funding, and you must be willing to agree to them. The good news though is that you have more negotiating leeway since this is private funding and not financial institution lending.
Though companies have been experiencing difficulties getting approved for business loans in the current economy, private equity financing has always been available. Unfortunately many business owners simply don’t know how to go about finding or raising this type of money. There are many sources of capital available today ranging from angel investors to private equity financing. The one that is right for your business depends on many factors, many have been discussed in this email.
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