If you were to ask a small business owner where to get a loan, most of them can rattle off several responses right away. After all, they most likely have a bank account- so that will likely be the first thing they’ll think of. Then, they may think about where they went for financing in the past.
That being said, if you were to ask those same small business owners about where to find private equity for their business. They don’t answer as quickly. Most of the time, when asked about private equity, entrepreneurs will suggest you check with an accountant or attorney. Some of them may even suggest a private equity investor they have spoken with.
Unfortunately, often small business owners don’t know where to turn for capital or there are not many capital providers in their area. This isn’t the only issue. Another problem is that many of the private equity providers are only interested in companies of a certain size/industry and have a certain amount of cash flow.
The truth is private equity investors are attracted to companies they can understand and can add value. Also, there needs to be a management team that they can make a connection with. After that, they will put a higher priority on transactions they believe are best for their funds.
There are some advantages and disadvantages to using private equity funds for a small business.
Advantage of Private Equity Funds
Private equity funds provide small businesses with access to capital beyond what a bank would finance. Plus, there’s the opportunity to pursue growth or an acquisition initiative that needed the cash to proceed.
Disadvantages of Private Equity Funds
Private equity funds are expensive. Small business owners will find that it’s always cheaper to obtain funding from a bank at almost any stage of credit or economic cycle.
However, the biggest cost is not financial. It’s the fact that private equity allows someone else in your business as a partner.
Small business owners don’t appreciate how uninvolved their lenders are. Sure, they need regular statements, payments, and the business owner must abide by certain covenants. But they are not involved in the day-to-day operations.
A private equity investor, on the other hand, takes a different approach. If you have a board of directors, they will take a seat on it. If you do not have a board of directors, they will create one. In addition, they will put a business strategy in place, create some guidelines for capital infusions in the future, and even draft a compensation structure, along with some other things.
As a small business owner, it’s a good idea to weigh the pros and cons of private equity funds. The key to finding a good match is to prepare ahead of time. You can’t wait until you need the funding to get started. Contact Commercial One Group to learn more about what private equity funds can do for you and your business.