A:

Similar to public companies, private companies also need funding for various reasons. A business typically needs the greatest amount of financing during the startup and growth phases, but it may also require a cash infusion for research and development, new equipment or inventory. While funding options for private companies are numerous, each choice comes with various stipulations. Money from personal savings; friends and family; bank loans; private equity through angel investors; and venture capitalists are all options for funding throughout the life cycle of a private company.

Friends and Family

In the early stages of a private company, personal resources are used to finance business operations. Pulling from savings, taking a distribution from a retirement account or taking out a second mortgage on a residence are common among new business owners. Once financing from personal resources dries up, owners may find funding opportunities among friends and family members. In most cases, private financing from close relatives or friends comes in small increments between $5,000 and $10,000, and repayment is often flexible. Additionally, friends and family who invest in the business do not often take an active role in operations.

Bank Loans

Conventional lending through a financial institution such as a bank or credit union is available for a private business that can provide proof of a strong financial track record. A conventional bank loan may require owners to show revenue sources, profit levels and detailed business plans prior to approving a loan, and as such is not appropriate for all private companies. For instance, a private business in the startup phase does not qualify for financing from a bank, nor does an established company that shows losses each year. However, bank loans provide a smart source of financing to developed businesses and allow for extended repayment over time with predictable fixed monthly payments.

Angel Investors

An angel investor is typically a high net worth individual who lends funds in exchange for an ownership stake in the company. Because of the equity position within the company, angel investors are more likely to provide substantial amounts of capital when they find a business in which they want to invest. Most angel investors are professionals in private equity, meaning the business seeking funding must pitch its need for financing along with current financial statements, its business plan and a viable exit strategy. Angel investors most commonly work with companies that have exponential growth potential and a desire to transition from private to public in the future.

Venture Capital

A venture capitalist is similar to an angel investor. This is a group of high or ultra high net worth individuals or a company that manages the assets of those individuals. Because of the volume of money that flows into venture capital firms, businesses able to secure capital through this medium are awarded deals of $11 million on average. Similar to angel investors, venture capitalists invest in companies with a strong track record of revenue and potential for extreme growth over time but also require an active role in business operations. Venture capitalists require an exit strategy, which makes this financing option best for companies that plan to go public or sell to another company in the future.

RELATED FAQS
  1. What are Some Advantages of Raising Capital Through Private Placement?

    Understand how a business can raise capital through private placement and the benefits business owners receive through this ... Read Answer >>
  2. How does the risk profile of private equity investments compare to those of other ...

    Learn how the risk profile of private equity investment compares to other asset classes and the aspects investors should ... Read Answer >>
  3. Investment Banking vs Private Equity

    Despite both shared similar characteristics, they are different in many ways. Check out how private equity and investment ... Read Answer >>
Related Articles
  1. Small Business

    Is Equity Financing the Right Choice for Your Business?

    Discover the benefits and drawbacks of equity financing for a small business, and learn when equity financing should be used instead of debt financing.
  2. Tech

    The Risk And Rewards Of Investing In Startups (GOOG)

    Investing in startups is a very risky business but can reward investors greatly if and when they do pay off.
  3. Small Business

    Small Business Financing: Debt Or Equity?

    There are two sources of financing for small businesses: debt and equity financing. This article explains both.
  4. Financial Advisor

    Being a venture capitalist: A how-to guide

    So you want to be a venture capitalist? Learn what it takes, what you need to know, where to start, and what kind of life you will need, to take on the world of venture capitalism.
  5. Investing

    Methods used in valuing private companies

    There are a few methods for calculating the valuation of a private company. By using financial information from peer groups, we can estimate the valuation of a target firm.
  6. Financial Advisor

    Should My Portfolio Include Private Equity?

    Private equity offers a lot of potential, but is it worth the risk?
  7. Small Business

    The 4 Most Common Reasons a Small Business Fails

    Discover the most common reasons small businesses fail, including capital formation, management concerns, planning issues and marketing missteps.
  8. Small Business

    How To Raise Seed Capital and Grow Your Startup

    To get a business off the ground, entrepreneurs need a clear understanding of how to strategically position themselves for VC firms and angel investors.
  9. Small Business

    Fed Raising Rates Affects Startup Funding

    With interest rates having nowhere else to go but up, the Fed’s impending interest rate raise will likely begin to reverse the flow of startup funding.
  10. Small Business

    Steps to Qualify For a Small Business Loan

    Learn steps to qualify for a small business loan such as identifying financing needs, preparing a business plan and getting required documents.
RELATED TERMS
  1. Angel Investor

    An angel investor provides financial backing for small startups ...
  2. Love Money

    Love money is capital given to an entrepreneur by family or friends ...
  3. Series B Financing

    Series B financing is the second round of financing for a business ...
  4. Equity Financing

    If a company needs capital to support its growth, it might seek ...
  5. Diluted Founders

    A slang term often used by venture capitalists to describe the ...
  6. Private Company

    A private company is a company held under private ownership with ...
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center