How to Finance your Business by Private Placement
After you made the market research and process of opening your business. The first important step is the need for a cash infusion to jumpstart sales, expand or continue to sustain growth. There are different sources of funding available to small business owners, each source has its limitations and requirements.
For example commercial bank loans are often intended for businesses that have been around and have shown a steady stream of profitability. Private placements are an attractive alternative for growing companies.
Was is Private Placements?
Private placements or private investment capital, is money invested in your company usually from private investors in the form of stocks and sometimes bonds. In the United States, private placements often does not need to be registered with the securities exchange commission. Regulation D is the most popular form of non-public private placement.
The majority of private placement dollars came from pension funds, investment pools, banks and insurance companies. However, private placements does exist for the small business owner and is often less expensive and easier than taking your company public.
Benefit of Private Placement
- High degree of flexibility in amount of financing ranging from 100 thousand to 10-20 million with combinations of debt, equity, or debt and equity capital.
- Investors are more patient than venture capitalist, often seeking 10 to 20% return on investments over a longer turn of 5 to 10 years.
- Much lower costs than approaching venture capitalist or selling, the stock to the public as an IPO (initial, public offering)
- Quicker form of raising money than usual venture capital markets
What is required for Private Placement?
- A sound business plan
- A private placement memorandum (PPM) disclosing the full facts of the investment and business
- A law firm or lawyer experienced in private placements
With the limited infusion of capital into the stock market, the private investor market is an attractive alternative for investors and small businesses. Private Placement offers a viable form of business financing without the constraints of taking a company public and conceding control.