Private financing for small business
The idea of being in business is suddenly sounding good as more and more people discover that their normal “day job” has little or no satisfaction at all. Ownership of businesses is not so much about the money (although this is obviously important); it is also about the freedom to be your own boss. It is about the beauty of seeing your business rise from nothing to anything.
This imagination can, for all intents and purposes, be consigned to the world of fertile imaginations or it can be given the necessary impetus to flourish. When talking about business financing and the necessary impetus, attention is always placed on the ability of a business owner or start up to finance their idea.
There are several private financing methods that can be adopted for this purpose and these include both debt and equity financing. Equity financing involves a financier coming into the business with the intention of owning a part of the cake. Examples of these include angel financing, venture capital financing, mezzanine financing and corporate venture financing. Debt financing on the other hand refers to the use of credit from lending institutions which include commercial banks.
This discussion concentrates on the investor whose available option is to private finance their business. Private financiers have traditionally been used as an alternative when one has failed to get the conventional loan as is increasingly becoming the norm. We will also discuss private funding of small businesses as a difference from government or public funding which is also a mode of business financing.
Lending requirements
Private lenders, just banks, will undertake the same due diligence as has been witnessed in the banking industry. They will look for that viable business idea, that right business proposal which should contain provisions for risks, reasonable profit forecasts, experienced management and off course, reasonable equity in the business. The beauty with these lenders is that they sometimes fund ventures which other lenders will shy away due to the risks involved.
Public versus private lending
A study by the Organization for Economic Cooperation and Development (OECD) indicates that most governments (government financing) across the globe are actually funding businesses through products that are variously christened. In all, these may be direct or indirect through what is called subsidies.
Indeed, as more and more governments recognize the need for the growth of small businesses so will their desire to chip in increase. The procedure for getting public business financing varies from industry to industry. What will cut across this board is that the more a government perceives sector to be of public benefit the more funds it will inject into it.
Profit and social growth
Private financing for small businesses will most likely look at the financial performance of the venture over a period of time. In fact, it is profit driven. Publicly financed small businesses on the other hand, have a bias for public welfare and general social development.
It is therefore true to say that the success of a privately financed small business can be evaluated by looking at the balance sheet while publicly financed businesses will be considered to be successful by evaluating concepts such as human life and its value, environmental concerns or national security and prosperity.
Financing of businesses through private means is the norm but may be complemented by forming partnerships with the state (Public Private Sector Partnerships)
References
|
