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Private Equity Financing Means Opportunity

Updated on August 25, 2015

Private equity financing is money invested in a business that is privately owned, and the investor actually takes an equity position in the company similar to equity partners. The capital that is available can have different sources such as institutional investors or private individuals willing to invest their wealth in exchange for a higher return on investment. There are plenty of opportunities available today for businesses needing business expansion capital.

Private investors are willing to invest their money in businesses because of the possible higher returns that can be earned compared to the traditional financial markets. A business funding category all its own, private equity funding does have some similarities to other private sources of funding like venture capital or angel investors. For example, all of these funding sources can be invested as startup funding or business expansion funding or even project funding. But private equity is typically given to businesses that have been in operation for while. There is no limit on how much is invested.

Understanding the Criteria

A business must meet investor determined criteria before funding will be awarded. Private equity funders want as much assurance as possible that their investment will return the expected gains and that risk of loss is as low as possible. The goal of course is to earn a higher rate of return than could be earned in other markets like the stock market or by making business loans. The investors also want assurance that the money will be used per the agreement.

In other words, the investor must measure the amount of risk of loss involved in the financing and then compare it to the probability of gain. At that point a decision must be made as to whether the risk is acceptable.

The following is a brief list of the types of questions a potential investor will want answers to before approving private equity financing. The questions are all geared towards determining risk.

  • Who assumes the highest level of risk? Is it the business owners or the private equity investors?
  • Is the business seeking to expand or does it need startup funding?
  • Does the business have skilled management with proven success?
  • Does the size of the funding request make sense when compared to the size of the business and the expected use of funds?
  • Is there a well developed business plan that has been carefully prepared?
  • Is the marketing plan reasonable and fact based?
  • Does the business have a solid financial history?
  • Will the business accept investor restrictions?

The last question addresses the fact that private equity financing is private money. As such, the investors, like equity partners, can establish any requirements desired as to the use of money, and are not restricted like traditional lending institutions. The business must be willing to accept whatever those terms may be. A negotiating process will take place during which the investment terms will be identified.

Growing a Business the Right Way

When a business is ready to grow, one of the biggest challenges faced is finding adequate business funding. The recession made it difficult to obtain bank business loans, but private equity capital has always been available. But the first step is finding the investors willing to invest in your company in the first place. You have to know how and where to find them. It’s no different than venture capital in that respect.

It’s a fact that capital sources are plentiful even when credit is tight. There are many private investors ready to help business grow. Whether you decide to approach angel investors or seek private equity financing will depend on the status of your business.

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by Julie-Ann Amos, professional writer, and owner of international writing agency

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    • Hello, hello, profile image

      Hello, hello, 6 years ago from London, UK

      Thank you for an intersting and informative hub.