How Private Equity Financing Works for Businesses

Securing capital is essential to the long-term success of businesses. Statistics show that one-third of all small businesses struggle due to a lack of capital. They aren’t able to secure a sufficient amount of capital, so they are unable to execute and expand their operations. Fortunately, there are different forms of financing available for businesses. Rather than applying for a loan, businesses can use private equity financing to secure capital. How does private equity financing work for businesses exactly?

What Is Private Equity Financing?

Private equity financing is a subset of equity financing. It involves a private equity firm purchasing an equity stake in a private business. Private businesses that need additional capital may look toward a private equity firm for assistance. They can sell an equity stake to the private equity firm, thus securing capital.

How Private Equity Financing Works for Businesses

Businesses are considered public or private depending on whether they trade on the stock market. Public businesses are openly traded on the stock market, meaning anyone can invest in them. Private businesses, conversely, are not traded on the stock market. Ownership can still exchange hands, but private businesses live up to their namesake by being privately traded.

Private equity financing focuses on private businesses. Public businesses can secure capital through stock offerings, but this isn’t an option for private businesses. Instead, private businesses must use an alternative financing vehicle, such as private equity financing. They can sell an equity or ownership stake in their business to a private equity firm.

Advantages of Private Equity Financing

When compared to debt financing, such as loans, private equity financing offers some key advantages. Private businesses can use it to secure capital without incurring debt. Like all forms of equity financing, private equity financing doesn’t involve debt. It only involves the sale of equity. Private businesses can sell an equity stake to a private equity firm.

Many businesses are unable to secure loans due to credit problems. They either have bad credit, or they don’t have any credit. Credit problems such as these will discourage lenders from approving loan applications. But even with bad credit or no credit, private businesses can still secure capital with private equity financing. These are just a few reasons to consider private equity financing if you own a private business.

What are your thoughts on private equity financing? Let us know in the comments section below!

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