Private Loans Made to Small Businesses

Private loans that are made to small businesses are becoming rarer given the current economic climate. This is ultimately attributed to the risk adversity among many private investors, venture capital firms, and private equity groups that often make investments into small and medium sized businesses. Due to the harsh economic climate, many investors are now seeking to earn much higher returns on their investment in order to counteract that many losses that they will take from business capital injections that will fail. A good rule of thumb to remember is that for every ten businesses that a private investor is engaged with that two do great, three to four will do reasonably well, and the other half will fail. As such, many private investment firms are now looking to take very large capital stakes in small and medium sized businesses rather than earning income from interest payments. Many small business people think that these rules are only applicable to then. However, large corporations have also had their fair share of trouble as it relates to obtaining normal credit financing. Recently, the number of companies issuing preferred stock has increased significantly as not only do investors want a regular return on their investment, but they also want to participate substantially in the capital appreciation associated with an increasing in the value of capital stock.

If you are a small business, you too can raise capital as if you were an extremely large corporation. Your business can issue preferred stock or debts that act in a very similar fashion to that of a publicly traded business. Additionally, if you are seeking a private loan for your small business you can issue warrants or call options on your private stock in order to sweeten the deal for an investor. A warrant or call option allows an individual investor to purchase shares from you at a specific price over a specific time frame. In some instances, especially when it comes to private loans made to small businesses, there is no time frame that inhibits an investor to purchase a specified number of shares in your business.

In closing, there are a number of different ways that you can receive private loans for your business without having to give up an undue amount of equity. In future articles, we are going to discuss the usage of call options in order to raise capital for your small business as it relates to private business lending. As always, before engaging in any type of capital raising activity, you should consult with your advisers and certified public accountants in regards to these matters.