WHAT IS A PRIVATE FUNDING?

People often ask me what is Private Funding / Lending and how does it work. So I thought I’d lay it out in a nutshell:

Private funding is where customers receive loans from private investors, solicitors’ funds, boutique lending firms and the like.

Funds are usually pooled by the fund manager from individuals or institutions that want a higher return on investment and usually have a higher risk appetite.

SIGNIFICANCE OF PRIVATE FUNDING:

Private funding is an option for small business owners that allows them to grow their enterprises. It encompasses many types of funding, including bank loans, cash from family and friends, and investments from individuals on crowdfunding sites..

TYPES Of PRIVATE FUNDING:
  • Personal investment: Some entrepreneurs may not want to accrue debt; instead, they use their savings (or sell an asset such as a vehicle) to get up and running. Some use a portion of theirretirement savings. Using your personal savings can be risky, as you could lose your life’s savings if your business fails.

  • Family and friends: Funding from family or friends could be provided as a gift, as a loan or in exchange for an ownership stake in your enterprise. Be careful, though. If the investment doesn’t pan out or you can’t repay the loan, it could cause permanent strife with those closest to you.

  • Term loans and lines of credit:Term loans, in which you pay a fixed amount each month to a bank, credit union or online lender, are popular with small business owners – as are lines of credit, in which you draw money when you need it. Your credit score, years in business and sales revenue dictate how much you can borrow and at what interest rate.

  • Crowdfunding: There are severalcrowdfunding websites that enable entrepreneurs to raise money for their ideas. Investors on platforms like Kickstarter or Indiegogo invest sums in exchange for helping products come to life. The companies usually offer rewards in exchange for contributions. Crowdfunding may not make you rich, but it may also serve another purpose: testing consumer interest in your product.

  • Alternative financing: Term loans and lines of credit aren’t the only private funding sources small business owners can access from lenders. Merchant cash advances and microloans are other options. With a merchant cash advance, lenders give a business ownercash in exchange for future sales. Microloans are small loans, typically $50,000 or less, for businesses that aren’t likely to be approved for a loan from banks and mainstream lenders. 
PROS AND CONS OF PRIVATE FUNDING SOURCES
BENEFITS OF PRIVATE FUNDING

Private funding sources provide a valuable service for small businesses through their more relaxed lending requirements and quick funding.

Unlike with bank loans, the money is in your hands much quicker. There are often lengthy approval processes with bank loans. Private funding options typically don’t have those same guidelines.

If you are using a venture capitalist or angel investor, there is the added benefit of being able to get advice from those who have seen it all. Venture capitalists and angel investors typically have vast experience in how to run a business. They have a lot to offer in terms of the knowledge and resources they can provide.

DOWNSIDES OF PRIVATE FUNDING

Private business loans come with a price – literally. Loans from private sources may have a different rate structure,additional fees and other costs that aren’t typical with bank loans. Goldenberg emphasized the importance of reading and understanding the loan agreement before signing.

“Some agreements will state that attorneys’ fees, collection costs and other considerable fees could be assessed on an account that enters default,” he said. “Some go as far as requiring the borrower to sign a confession of judgment, which would allow the court to enter an expedited judgment against the borrower, without a trial, in the event of default.”

These types of terms and conditions may be present with venture capitalists or angel investors; you’re also more likely to see them in agreements from online private lending institutions. 

You may also encounter more demanding payment schedules with private lenders than with a traditional bank loan. Before making a final determination whether private funding is the right option for your business, weigh the benefits and drawbacks.