Is Private Equity Investment the Answer to Small Business Funding Needs?
As most small business owners have now become painfully aware, banks are just not lending as much as they used to anymore and merchants who want to borrow to expand their businesses, buy much needed equipment or add employees are hard pressed to obtain funding.
Many are turning to Private Equity Investors for financial assistance but is private equity investment the answer to small business funding needs?
Before we can answer this question, we need to define private equity investments. Private equity investors provide money for privately owned enterprises such as start-ups or already established small businesses that want to expand their existing companies. Private equity investors can be either individuals or groups who pool their resources together to provide a private equity fund. Among the most common investment strategies in private equity are: leveraged buyouts, venture capital and growth capital.
The type of equity investment that is most likely to pertain to an established small business is the Growth Capital model and is usually a minority investment. These investors are looking for more established companies that just want to expand or reorganize their small business operation. These financiers generate their income/profit in part in minority ownership of the small business and in part in contractual return (i.e. interest payments). Companies that are seeking Growth Capital usually do not qualify for other sources of monetary funding.
The Venture Capital model is more aggressively involved in the operations of the small, high potential, high risk business in which it invests and makes its money by owning a part of the company. The return/profit is made most specifically when the business goes public or is sold. Because of the high risk involved in these companies, they also might have difficulty qualifying for more traditional funding.
The above-mentioned models sound like viable solutions for the funding needs that many small businesses face, but caveat emptor (or in this case caveat borrower)! An article recently published in the New York Times discussed the fate of an Atlanta small business owner who gladly accepted the offer of Private Equity Funding. He was so excited by the thought that he didn’t recognize, until after the funds were raised, the number of constricting clauses involved, and consequently lost total control of his company. The business began to move in a direction completely opposite to the one the entrepreneur was originally headed in. The final straw came when he arrived at work one day to find his close colleague had been handed his walking papers. The business-owner-turned-employee decided it was time for him to go as well. The company’s profits took a dive and now the small business only exists on paper. Unfortunately, in this case, Private Equity Funding was not the best choice.
If you, as a small business owner, are looking for financing but are unsure of your next step, contact the Financial Experts at Liberty Capital Group. They can offer you sound business financial solutions with no obligation.