Private equity investors fall into the same investing category as venture capitalists. They give financial help and practical guidelines to new ventures in exchange for equity. But venture capitalists put money into novice projects expecting to receive a significant profit in the long term, while private equity funding firms consider more developed ventures that allow them to have a clear exit strategy.
Equity funding firms invest in fewer projects and intend to increase their profit margins by selling off the company or going public within in less than ten years. Company owners often get more money and deal with less red tape if they take the private equity route rather than going public.
You need to know about the two major categories of business funding. It is debt funding and equity funding. Both financing options have their good side and their bad side; making it easier to find the investor that fits your business in the optimal ways.
Debt funding refers to money that is borrowed and has to be repaid over a period of time with interest. Debt funding can be either short term or long term. Short-term debt funding requires the loan to be repaid within a year. Long-term debt funding involves repayments for more than twelve months. With debt funding your only responsibility to your lender is to pay back your loan. Banks and traditional lenders are the chief sources of debt funding. You will have to make repayments with interest every month with debt funding.
Equity funding is the barter of money for a share of business. This enables you to secure financing for your company without taking on the burden of a debt. The sale of equity means taking on investors. Many small businesses obtain equity by bringing in investors to make their business succeed and get a profit on their investment.
The principal advantages of equity funding are that you do not have to pay back your investors even if your company goes bankrupt. Your business resources are not required to secure equity. A business with adequate equity will seem better to lenders, investors, etc. Because you do not have to make debt repayments your business will have more cash on hand.
The main disadvantage is that you will have to surrender ownership and a share of your businesses profit to other investors. The investors may have plans and ideas that are different from yours. And you can’t claim payments to investors back against tax.
If you have a great business plan and are looking for vc funding for it, a willing venture capitalist or business angel is waiting to help you start you off down the track. Venture funding is straight forward to find if your venture is set to grow.
