Financing your business through private placement

The one constant in the life of any business (especially startups or small businesses) will be the need for a cash infusion to jump start sales, expand into new markets, or continue to sustain growth. While there are a multitude of financing sources of funding available to business owners, each source will have its limitations and requirements. For example, commercial bank loans are often intended for businesses that have been around and have shown a steady stream of profitability. They are much more difficult for smaller business to access since lenders see these companies as having a much higher risk. The good news is that for these situations there are options.One of the best options is private placement.Private placements can be an attractive alternative for growing companies.

Private placement is also known as private investment capital.This is money that is invested in your company usually from private investors in the form of stocks and sometimes bonds. One of the benefits in the United States is that private placement often does not need to be registered with the Securities Exchange Commission. Regulation D is the most popular form of non-public private placement. Financial records show that several hundred billion dollars are issued in the private placement market each year. Interestingly, the majority of those dollars came from pension funds, investment pools, banks and insurance companies amounting to just over 2,000 deals. However you should keep in mind that private placement does exist for the small business owner and is often less expensive and easier than taking your company public.

There are many benefits to private placement.Here are just a few of them:

• Private placement has a high degree of flexibility. With the amount of financing ranging from $100,000 dollars to 10-20 million dollars with combinations of debt, equity, or debt and equity capital this makes this option workable for almost every business.


• Private placement investors are often more patient. Many investors are willing to wait for a return on their investment.While venture capitalists are seeking almost immediate payoffs investors are often seeking 10 to 20% return on investments over a longer term of 5 to 10 years.


• Private placement has a much lower costs. This is a much more cost effective method than approaching venture capitalists or selling the stock to the public as an IPO (Initial Public Offering).Businesses can generate the needed cash flow without incurring significant debt to do so.


• Private placement is faster. This method of financing is a much quicker form of raising money than usual venture capital markets. This is especially good for small businesses that need the cash flow quickly and cannot afford to wait out lengthy stock negotiations.

While every business can possibly benefit from private placement there are businesses that are more ideal than others. The ideal small business candidate for private placement is a company in the third stage of finance and is looking for growth or expansion funding. Small business owners might think private placement only applies to start-ups when your company has completed product development, conducted a market-feasibility study and business planning but start-up funding often comes from angel investors.

The money from private placements will come from accredited investors as it is defined by the SEC Rule 501 under Regulation D as:

• An individual who is earning $200K per year.


• A household that has an income of $300K per year or having a net worth over $1M.


• Or a venture funds, some banks and other institutions.

You can connect with bankers, attorneys, and accountants who can network your small business with a private investor. Private placement can offer a viable form of business financing without the constraints of taking a company public and conceding control.