How do private businesses get capital?
- Feb 7
- Written By Adeleine Whitten
How do new private businesses raise capital to get started?
After the 2008 recession, it suddenly became more difficult than ever for new companies to get funding the traditional way. Banks suffered significant losses due to companies defaulting on their loans, and as a result they were much more particular about which companies qualified for loans going forward.
But despite the difficulties securing funds, entrepreneurs continued to start businesses – they just had to find new ways to gain that initial capital.
Fortunately, there are many viable ways outside of banks to acquire the capital needed to get your private business off the ground – it’s just a matter of which option is right for your situation.
Personal Wealth
Although this may be the most obvious answer for some, only a small percentage of new business owners have the means to fully fund a business from their bank accounts. That being said, if this new company is just another addition to an already-successful business portfolio, there may be plenty of personal capital to invest into a new venture.
If desired, business owners also have the option to withdraw from their retirement funds early or take out a second mortgage to acquire the capital needed to self-fund a new business. It should be noted, however, that this option comes with a significant amount of risk for the business owner.
Friends and Family
If personal wealth has run out – or isn’t available at all – new business owners could work with friends and family who have the means to invest in this new business venture. Even if they don’t take an active role in the company, their investments, small or large, can help get the company started and then paid back over time as the business starts turning a profit.
Cash Advances
Cash advance loans are often considered predatory, but some businesses may see them as their best option. Lenders will allow entrepreneurs to borrow against their future income – essentially forfeiting their first or first few paychecks. This can lead to a cycle of debt that’s difficult to escape. Additionally, the fees and interest rates are often high, making it impossible for new business owners to get in the green.
So although these advances can be used to purchase equipment or support other logistics in the beginning stages of a company, the choice should be carefully considered before committing to anything.
Venture Capital
Venture capitalists actively search for new businesses with high growth potential that they can invest in. This could be in the form of individual investors – sometimes called angel investors – or venture capital firms. Although they’re taking on significant risk, it’s with the assumption that there will be greater reward if the company succeeds.
If venture capitalists take an interest in your company, they’ll review your business plan, perform their due diligence, and make an offer. Once the terms of the investment are agreed upon, you’ll receive funding, typically in rounds. It should be noted, however, that venture capitalists often want to own a portion of the company they’re investing in, so be prepared to give up some control in exchange for funding.
Private Equity
Depending on the business’s current value and potential for growth, new companies may capture the attention of private equity firms. Private equity firms work with several investors to take control of a new company and rapidly increase its worth, therefore growing their investment.
The firm may work with current management to plan and execute new strategies, or they may bring in industry experts to take over. But because private equity firms only hold their investments for a limited number of years, business leaders are incentivised to make drastic changes – and start seeing results – as quickly as possible in order to see justifiable growth.
Crowdfunding
Crowdfunding has risen in popularity over the past few decades, and it can be a great option for business owners to raise capital. Instead of a few investors making large donations, crowdfunding is often many investors making small donations using the power of the internet. In return for their early contributions, funders can be rewarded with early access to products, votes on how the company will operate, or even partial ownership of the business.
Private Debt
Any debt that’s funded by private companies is considered private debt. This could mean another private company is directly lending to a new business, or maybe the debt was purchased by a private company down the line. And although private debt may come with higher interest rates, private companies aren’t as particular about who they lend to – they see the loan as an investment, and investments are bound to come with both gains and losses.
Depending on the situation, private debt could be collateralized or unsecured. Collateralized debt involves the business owner putting up an additional asset as collateral for if the loan goes into default. Unsecured debt, however, has no collateral backing. Because unsecured loans are issued at a much greater risk to the lender, they are most often used for reputable business owners with excellent credit.
Financial and Investment Advisors
Even once you have what you need to get started, working with a financial/investment advisor can help you maintain (and grow) your cash flow as you move along. Advisors work with small businesses to manage all aspects of the finances including spend analysis, profit/loss reporting, and tax advice. If money management isn’t your strong suit – or even if it is! – working with a financial/investment advisor can help you maintain your strong start to your business and take it to the next level and beyond.
Your Next Steps
With a basic understanding of the terminology, processes, and pros and cons of various ways to fund your new business, you’re on your way to a thriving company. If traditional bank loans aren’t an option – or if you’re just looking for more flexible options to get your business off the ground – any one or combination of these strategies can help you get off to a great start.
For a modern, all-in-one solution for getting your investment funded, check out OpenAlt. OpenAlt gives sponsors the unique ability to get their opportunity in front of investors across the country, raise capital, perform due diligence, and track the project’s progress in realtime. To learn more or schedule a demo, visit https://openalt.com/contact-us/.
