Why Businesses Use Private Equity Financing
The current economy makes finding new sources of additional capital tricky. Banks are less willing to lend money than they have been in the past, and many businesses are finding that they must turn to less-traditional lending avenues in order to gain the funding they need. Private equity financing is one such avenue.
Private equity financing is a process whereby an invests in a private company. This can be accomplished by way of mezzanine capital. Mezzanine capital is a form of subordinate debt, which means that in the event the business fails, senior debts are paid off before mezzanine financings. This investment allows the private company to continue doing business with no change in leadership, ownership, or direction. The income provided via this arrangement can be used for many things, including management buyout, new acquisitions, growth capital, and more.
So the question becomes – why would a company choose to use private equity financing? The availability of this kind of financing is the primary reason for its popularity. It’s often used once traditional means of funding have been exhausted. This financing is still available once you’ve reached the point that banks will cease to loan you additional funds. It’s particularly effective in real estate finance in order to secure the financing required to develop land that has been purchased via a mortgage. The bank is unwilling to offer additional funds on top of the mortgage loan they’ve already extended, but the developer needs to borrow the money to advance the property in order to market it. Financing in the form of mezzanine capital will allow the developer to build as needed, with repayment terms that are suitable to the transaction.
Another motivation for choosing to use mezzanine financing over traditional financing means is the larger amount of available funds. A bank will limit its loans to what collateral you have to offer, or to what you can pay off based on historical revenue data. A private investment company will consider the growth impact that their investment will have, and offer funds based on that possibility.
If you’re hoping for advice and some involvement in the decisions you make once the funds have been transferred, then private equity financing is a good choice. Generally, a mezzanine financing arrangement will allow the investor to have a more hands-on approach, sitting on the board and assisting in directing the future of your business. You’re gaining more of a partner, one with experience and leadership capability.
