Small business owners have to keep track of so many things these days. Payroll and employee issues, inventory and supply costs and availability, managing utility costs and other overhead expenses... these things and more can really affect an owner's health and well being. And if the need for financing is added to the mix, a major headache could be right around the corner. So when someone suggests a private equity investor for the business during a time of slow cash flow, it may be more than the business owner can bear.
But private equity investors can definitely make a business owner's life easier. They can generally provide needed funds faster than the owner could get it through corporate credit options offered by the big banks. These investors are usually easier to work with than Mom and Dad or some other family member who might insist that lending money to the business gives them the right to interfere in that business. Private investors do occasionally take some kind of interest in the business, but that is negotiable in advance. And if their advice and assistance is welcomed by the business owner, it can be as valuable as the loan itself.
Most private equity investors prefer to invest in businesses with which they are familiar and have some particular interest. Car guys-and gals-might like to invest in a used car business that is just getting off the ground. Computer experts might enjoy investing in a small business that is producing new proprietary software or a new laptop design. And since private investors do have an interest in the business, they usually understand the ins and outs of it. They have contacts that they can provide to the business-and those things make them even better partners.
Private equity investors usually lend money in return for a stake in the business. That makes them part owners, which may or may not give them the right to some measure of control in the way the business is run. That element is negotiable at the time the rest of the loan terms are negotiated. And that negotiation should be detailed and specific. No owner wants to sign away too large a stake or too much control in his company. Not only does that reduce his own share of the profit but it could make it more difficult to find a larger investor down the road. A bank that specializes in credit for international expansions, for example, may not want to step into a situation where too many people have a say in financial negotiations.
As far as the terms for a private loan, they are more flexible than a large bank might offer. Such a loan can be set for a short or long term, generally at a maximum of seven years or so. The longer the term lasts, generally speaking, the lower will be the yearly rate of return that the investors will expect. Then, at the end of the term, the relationship would be severed. Or the business owner may find that he has received so much of a side benefit in advice and contact, that he may want to extend the relationship.
But it is a business relationship and both parties must remember that. The investors are in business to make money and the business owner is in business for his own reasons-and making his own money is usually a primary goal. That shared goal can only benefit both sets of partners, resulting in a thriving business that brings satisfaction and profits to everyone involved.
Corporate Credit Concepts specializes in Private Equity Investor. For more information about Private Equity Investor and how it might benefit your business, please CLICK HERE for a free phone consultation.