When it comes to generating funds for your business, private equity funds are the best way of funding for start-ups, as they seldom qualify for conventional bank loans.
Additionally, private equity financing also involves investments with a guarantee of getting the money back with big profits, so the investors aren’t so hesitant about lending few thousand dollars to a business that has a fantastic plan. They won’t even mind waiting for 3-4 years before seeing the real profits, unlike the conventional lenders who demand repayment on monthly basis right from the word go.
Benefits of Private Equity Funding
At times, investors can call and explain to the business owners how to spend money. Private equities finance is usually used as the start-up capital for project funding, businesses, and extensive development. Currently, the market for private equity financing is one of the best and great business choices, since it doesn’t offer any restriction on the money that can be invested for making monthly payments. As a business owner, you may not be obliged to pay any monthly repayments as in case of repayment of business loans.
Equity holders get a share of annual profits, and these private equity funds aren’t actually business loans. But, the new entrepreneurs can certainly treat them as loans, and just assume that the profits that they’re sharing with the investors are nothing but loan repayment.
Before You Call the PE Investors
You need to incorporate your company. It is necessary to incorporate your company and form LLC (Limited Liability Company), and then formulate a stupendous business plan.
It is necessary that you purchase, lease, or rent a space for an office, where you may call the potential investors. Hire some staff members and make sure that you take care of all licensing fees. You need to secure a credit line of at least USD 50,000 and expect to spend almost $10,000 for obtaining licenses for your business locations to make necessary transactions, especially if you’re operating in the IT sector.
How to Generate Large PE Funds?
Well, there’s simply no shortcut to generating large PE funds and you certainly need a very powerful business plan to impress the investors, and convince them to invest big amounts in your business.
However, the uniqueness of the business idea, the experience of the founder, the expertise of the current workforce to execute the plans, and the rate of returns certainly play a decisive role. If the private investors were to invest a million dollars, and the returns could be in the tune of about 50 million, then they’d certainly be very interested in such propositions.
On the other hand, if the business plan doesn’t have enough potential to even generate 5 million dollars, then the private investors are certainly going to be least interested in funding such ventures.
In a Nutshell
The bottom line is that venture capitalists and private equity investors always look to invest in businesses that have a USP about them and have a lot of growth potential in the coming years. If there already are dozens of similar services/products in the markets, then the chances are low that investors would take up such propositions seriously.
And, of course, the worst thing that a small business owner can do is to approach the private investors without analyzing the long-term growth prospects of the business, and its competitors in the markets.
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