Types of Financing & Investors
For most businesses, financing is the single most essential ingredient they need to make their venture a success. While there are a number of conventional lending sources such as banks and financial institutions, there are also other more effective means of securing private investors’ backing for their ventures. One of the most popular alternative sources of private finance is to tap the resources of wealthy private investors. In fact, investors are often referred to as the “new banking,” since they typically have the highest level of expertise when it comes to managing a company. The role of private investors has only recently come to light in corporate finance circles, but they have proven to be invaluable partners for many successful companies in the past decade.
Private financing can be used for a variety of purposes. A company may seek capital during the start-up phase of operations in order to fund the growth of the company. Private investors can provide start-up funding in the form of stocks or preferred stock. They may also provide long-term financing by purchasing preferred shares in the company. Some private investors also believe that they can be a source of additional capital for a company during periods of financial distress. Regardless of the type of financing sought, it is imperative that companies utilize a professional team of financing experts who have expertise and access to the proper resources to ensure the success of any venture.
In general, businesses obtain private financing in two primary ways: through the process of selling a portion of their ownership or via a debt-to-equity exchange. Business owners looking to raise capital should always start by exploring the options which they have available for them. Many private investors are willing to finance a start-up for a limited period of time, as long as the company meets certain criteria. This allows businesses to increase their sales in a steady manner while working with a reliable source of capital until their company becomes profitable.
Funding & investors can also be sourced through the purchase of an investment property. This occurs when private investors provide capital to a business in return for equity or an ownership stake in the company. Smaller businesses usually make use of this method of raising funds, as it is relatively low risk for the entrepreneur. However, there are instances where large banks provide seed capital to fledgling businesses as an option when they cannot receive traditional financing from a third party. The bank will then assume a large portion of the losses from the business in the event of its failure. Because most banks offer specialized loans for various purposes, it is often easier to obtain funding this way.
Commercial real estate investors typically seek capital to expand their current operations. They do this by purchasing a fixed property which they construct or own. These properties will then be used to provide housing for their employees. As property prices rise, many commercial investors sell their holdings to raise capital for new ventures.
A relatively new method of obtaining financing is referred to as business incubators. These companies will provide an initial seed funding to a business in exchange for equity or a lease of a portion of the business. Business incubators will typically take care of the technical and marketing aspects of a business while the entrepreneur focuses on developing a product or generating revenue. In some instances, this hybrid model of financing can be extremely beneficial to small businesses that have limited means.
