Detailed analysis on Bank and Private Equity Financing

Other than the pedagogies that we have discussed till now, the most celebrated means to procure funds still remain to be financing from the nationalized banks and personalized private equity small business funding. Thus, we bring you a precipitated note on the procedure of obtaining small business funding from banks and private money lenders both. The blog article also makes you aware of limitation you could face while trying to procure loans from either of the institutions.

Bank Financing

The most popular and celebrated means of procuring small business funding is traditional model- banks. Most new business owners seekbanks to obtain short term loans for business expansion. Banks provide small business funding in exchange for personal guarantee or security in the form of assets owned by an individual or the company. There is also a possibility that banks may decline one’s loan application.

Why banks may decline loan applications?

• Start-ups are considered really high-risk ventures. Thus, many banks decline loan applications by early-stage business owners who lack either sufficient security or business experience to support them.

• A drastic rise in number of small ventures in the past decade has made banks witness a crowd of loan applications.This has led to banks revising their loan provisions/conditions and terms, making business loan available to only those companies that fulfil their strict loan selection criteria. Since most businesses in their nascentstages lack business finesse, chances are they may be refused any lending from popular traditional banks.

• Also mushrooming of these numerous businesses in every nook and corner has forced banks to exercise caution. Resultantly, they have made the loan eligibility criteria very stringent that is difficult to cope up with when one’s business is setting up. Consequently, they are rejected bank loans.

However, over a period of time if the organization is generating good business, is maintaining its credit ranking, assembling and handling its securities well, keeping the documents in place and documented, it helps in enabling one to meet a loan eligibility standard. A quick word of caution for you, Banks differ in their loan schemes; a thorough research before applying is important.

Else you could also procure money from private money lenders, also termed as private equity. Though these private money lenders allow you a bigger grant than your present economic stature could afford, but it is fairly high return investments. Take a look at how this system functions:

Private Equity Small Business Funding

Private equity, or venture capital, supports business growth through high-risk, high-return investments for approximately 3 to 7 years before capital funding is withdrawn. Venture capital investing firms provide small business funding to high-potential growth businesses in exchange for company shares. Venture capital small business funding is a six-stage financing that is directly aligned to developmental stages of company; it keeps releasing funds as the business keeps expanding and entering the next sphere of performance.

Howdoes Private Equity funding function

• Seed Money financing or low-level funding helps prove a business idea and is provided by an affluent individual or investor.

• Start-up financing is provided to companies to cover business marketing and product development costs.

• Following PD, the first-round capital takes care of a company’s early sales and manufacturing costs.

• Second-round financing allows companies to continue their product marketing processes, since most businesses take time to benefit and make profits from sales.

• Once a company starts profiting from sales, third-round or ‘mezzanine’ financing allows business expansion.

• Continued funding encourages companies to ‘go public’. This is also called ‘bridge’ financing.

Targeting dedicated venture capital companies with proven track records of investment successes ensures the best results for your business. Along with these, there are certain money lenders who allow you the grant lump sum without taking the burden of releasing it cyclically. This helps the organization to use more in the sphere it deems most fit. That is how these two set-ups aid business formation and expansion in formative years of a business.

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