1. Private equity
Private equity investment is a type of equity financing which is provided in exchange for ownership of part of a privately held business. Arranging a deal with a private equity house can be a good way to secure a large amount of capital for growth.
However, private equity investors are selective about the businesses they invest in and have a range of expectations about how your business should perform. To be eligible for private equity funding, your business will usually need to be well established with a good turnover.
Once they have invested, private equity houses typically expect to see fast growth, leading to a rise in the value of your business so that they can exit their investment at a profit, typically within a few years. The management teams of businesses sometimes fall out of alignment with their private equity investors on the question of when and how to pursue an investment exit, so it’s important to discuss these matters in advance and adopt realistic expectations.
Another feature of private equity houses is that they are often, though not always, majority investors. Founders or management teams who want to retain ultimate control of decision-making may decide that majority investment is not the right option for them.
2. Business loans
Business loans are a traditional form of debt-based financing. Unlike equity funding, business owners are not required give up a share of the business; however, they are required to repay the loan with interest. Business loans typically provide a low to medium level of funding and can be secured or unsecured.
- Secured business loan: This type of loan involves borrowing money against an asset, which could potentially be repossessed in the event of non-payment. By opting for a secured loan, companies are generally able to borrow larger amounts with lower interest rates.
- Unsecured business loan: Unsecured loans don’t require the use of business assets as security but tend to be less cost-effective than secured loans.
Whether a business loan is appropriate depends on the ambitiousness of a company’s growth strategy. Small and medium-sized businesses usually find that less money is available to them in the form of business loans than could be accessed by selling equity. In addition, they must factor the cost of interest payments into their growth plans.
3. Patient capital
Patient capital is a form of equity financing that emphasises long-term, sustainable growth. It works in a similar way to private equity but differs in that patient capital tends to be a type of minority, non-controlling investment. As the name suggests, investee businesses are not under pressure to provide a quick return but can grow at the appropriate pace for them.
- This form of financing can be long-term in nature if that is what is best for the business. Patient investors typically don’t impose drag rights, which give an investor the ability to trigger a sale at a time of their choosing.
- Patient capital is generally provided in exchange for a minority, non-controlling stake in a business. Management teams stay in control of key decision-making, setting their own path for growth.
Ambitious businesses that are apprehensive about the pitfalls of traditional private equity often turn to patient capital to help find their growth. BGF has provided patient capital to more than 450 businesses across the UK and Ireland.