In a previous article, the alternative funding option leasing discussed. In addition to leasing, there are other financing options in SMEs, besides financing from the bank, for further growth. Two possible alternative forms of financing are private equity and private debt.
Private equity
In both private equity and private debt, investors make venture capital available, particularly to growing unlisted companies, through a fund of investors. Despite the fact that the basic principle looks the same, the two are different. The major difference between private equity and private debt financing is the consideration for capital.
In private equity, financing is provided to the company in exchange for shares (equity). Private equity parties make returns the moment the company makes returns. Also, a private equity party often wishes to obtain a majority stake in your company, so that they have maximum control and can therefore (also) maximise their own returns.
Private debt
In private debt, financing is provided to the company in exchange for a risk fee (debt). Private debt parties make returns through the interest fee they receive. These parties are usually looking for companies that need multiple refinancing due to growth. In order to limit risks, a private party usually works with a call option on shares with a view to convertibility. This way, they have the right to buy the shares and can capitalise the expected growth through the growth financing(s). This also means that private parties are mainly interested in promising start-ups and companies in (the beginning of) a phase of strong growth.
Private debt is a relatively new form of financing that has only really taken off since the financial crisis. During negotiations with private equity/debt parties, it is extremely important to engage an adviser who can safeguard your interest. We have several years of experience in this and can adequately guide you through alternative funding routes.