What is Private Equity Financing?
Private equity financing is money that is invested in a privately held business. So, it’s in exchange for partial ownership of the business.
The invested funds might come from private individuals or institutional investors. Regardless of where it comes from, there are many individuals and businesses ready and willing to invest in a make-sense business.
The goal of the investment is to earn more of a rate of return than they could get otherwise.
It can be like venture capital or angel investors where the investors can choose to invest startup funding. But usually the business has been operating for a while and needs money for expansion.
Private Equity Financing Details
Private equity financing often involves large amounts of capital. Still, there is no set limit of how low or high the investment can be.
Despite the fluid nature of this type of financing, there are criteria a business will have to meet. So this is in order to get this type of business funding.
Private Equity Financing: the Methodology
The investors will look for assurances that you will use their money wisely. And they want to see how the business is increasing the likelihood that the investment will bring higher returns than they would expect if giving business loans.
The investor will balance the risk of investment loss again the possibility of investment gains. They then make a decision as to whether the risk is manageable and makes sense.
What Does the Investor Want to Know?
The investor will look to see if the entrepreneur assumes more risk exposure than the equity partners or investors. They want to see what stage is the business currently is in if they are a startup. Or they may want a well established business looking to expand. And they will check how much experience does the management have in the industry. They also want to know how large is the investment request. Plus, they need to know how it compares to the size of the business.
The investor will also look to see if there is a quality business plan with realistic goals and projections. So this is to see if there is a marketing plan complete, look to see what is the company’s history including its historical financial and market performance. And they want to see if the business is willing to accept any restrictions an investor will place on the investment.
The last question may seem obvious at first glance, but it’s on the list for a reason. Private equity investors can set their own unique requirements and restrictions for business funding. And you must be willing to agree to them. The good news though is that you have more negotiating leeway. That’s because this is private funding and not financial institution lending.
Companies may be experiencing difficulties getting approval for business loans in the current economy. But private equity financing has always been available. Unfortunately many business owners simply don’t know how to go about finding or raising this type of money.
An Alternative and a Supplement to Private Equity Financing is Building Business Credit
Company credit is credit in a small business’s name. It doesn’t link to a business owner’s personal credit, not even if the owner is a sole proprietor and the sole employee of the company.
Therefore, a business owner’s business and consumer credit scores can be very different.
Considering that small business credit is independent from consumer, it helps to secure a small business owner’s personal assets, in case of court action or business insolvency.
Also, with two distinct credit scores, an entrepreneur can get two separate cards from the same vendor. This effectively doubles buying power.
Another benefit is that even startup businesses can do this. Heading to a bank for a business loan can be a formula for frustration. But building business credit, when done correctly, is a plan for success.
Consumer credit scores are dependent on payments but also various other considerations like credit use percentages.
But for small business credit, the scores really just hinge on if a small business pays its invoices promptly.
Building small business credit is a process. It does not occur without effort. A small business has to actively work to build small business credit.
Still, it can be done easily and quickly, and it is much more efficient than establishing personal credit scores.
Merchants are a big part of this process.
Accomplishing the steps out of order leads to repetitive rejections. Nobody can start at the top with business credit.
A business has to be fundable to loan providers and merchants.
For this reason, a small business needs a professional-looking website and email address. And it needs to have website hosting bought from a company such as GoDaddy.
And, company phone numbers need to have a listing on 411. You can do that at ListYourself.
Also, the business telephone number should be toll-free (800 exchange or the equivalent).
A small business also needs a bank account dedicated purely to it, and it has to have all of the licenses necessary for running.
These licenses all must be in the correct, accurate name of the company. And they must have the same small business address and telephone numbers.
So note, that this means not just state licenses, but potentially also city licenses.
Dealing with the Internal Revenue Service
Visit the Internal Revenue Service website and get an EIN for the business. They’re free of charge. Pick a business entity like corporation, LLC, etc.
Incorporating will diminish risk. And it will make best use of tax benefits.
A business entity matters when it involves tax obligations and liability in case of litigation. A sole proprietorship means the entrepreneur is it when it comes to liability and tax obligations. No one else is responsible.
The best thing to do is to incorporate. Only look at any DBA as an interim step on the way to incorporation.
Starting the Business Credit Reporting Process
Start at the D&B web site and get a free D-U-N-S number. A D-U-N-S number is how D&B gets a small business in their system, to produce a PAYDEX score. If there is no D-U-N-S number, then there is no record and no PAYDEX score.
Once in D&B’s system, search Equifax and Experian’s web sites for the company. You can do this at www.creditsuite.com/reports. If there is a record with them, check it for accuracy and completeness. If there are no records with them, go to the next step in the process.
By doing so, Experian and Equifax have something to report on.
Starter Vendor Credit
First you should build tradelines that report. Then you’ll have an established credit profile, and you’ll get a business credit score.
And with an established business credit profile and score you can begin to get credit for numerous purposes, and from all sorts of places.
These sorts of accounts tend to be for things bought all the time, like marketing materials, shipping boxes, outdoor work wear, ink and toner, and office furniture.
But first of all, what is trade credit? These trade lines are credit issuers who give you starter credit when you have none now. Terms are ordinarily Net 30, rather than revolving.
Therefore, if you get approval for $1,000 in vendor credit and use all of it, you must pay that money back in a set term, like within 30 days on a Net 30 account.
Vendor Credit – It Helps
To launch your business credit profile the proper way, get approval for vendor accounts that report to the business credit reporting bureaus. Once that’s done, you can then use the credit.
Then repay what you used, and the account is on report to Dun & Bradstreet, Experian, or Equifax.
Here are some stellar choices from us: https://www.creditsuite.com/blog/5-vendor-accounts-that-build-your-business-credit/
Accounts That Don’t Report
Non-reporting trade accounts can also be helpful. While you do want trade accounts to report to a minimum of one of the CRAs, a trade account which does not report can yet be of some worth.
You can always ask non-reporting accounts for trade references. And, credit accounts of any sort should help you to better even out business expenditures, thereby making budgeting easier.
Monitor Your Business Credit
Know what is happening with your credit. Make certain it is being reported and attend to any inaccuracies as soon as possible. Get in the practice of checking credit reports. Dig into the details, not just the scores.
We can help you monitor business credit at Experian, Equifax, and D&B for 90% less than it would cost you at the CRAs.
Update the details if there are mistakes or the information is incomplete.
A Word about Building Business Credit as a Supplement to Private Equity Financing
Always use credit sensibly! Never borrow more than what you can pay off. Keep an eye on balances and deadlines for payments. Paying off in a timely manner and in full does more to boost business credit scores than virtually anything else.
Establishing company credit pays off. Good business credit scores help a business get loans. Your loan provider knows the business can pay its financial obligations. They know the business is for real.
The business’s EIN connects to high scores and loan providers won’t feel the need to call for a personal guarantee.
Business Credit Building and How it Relates to Private Equity Financing
Business credit is an asset which can help your company in years to come. Learn more here and get started toward building company credit.
Private Equity Financing Isn’t The Only Option Out There
There are many sources of capital available today ranging from angel investors to private equity financing. The one that is right for your business depends on many factors. We offer many of them.