Private Equity: Advantages and Disadvantages

By David Harrison
Content writer
Last update: 7 July 20211 minute read
Private Equity: Advantages and Disadvantages

Does your business need additional capital?

A vital responsibility of every UK business owner is ensuring that you have capital at hand to support growth, innovation, day-to-day operations and maintain a reliable supply chain.

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As such, it’s an aspect of running a modern business which cannot be overlooked. The problem, however, is that capital often isn’t easy to acquire, which can make Private Equity funding an appealing avenue to explore. The advantages and disadvantages of taking the Private Equity route are numerous, making it a difficult area for any business owner to navigate easily. But if this is a route that you’re considering, it’s vital that you fully understand what’s involved and how it may affect your business in the long run - whether you're looking at Private Equity for management buyouts or something else. So, in order to make an informed decision, here’s what you need to know about Private Equity.

Advantages of Private Equity

If you’re looking to raise capital in order to support and develop your business, there are many advantages of Private Equity that make it a worthwhile avenue to consider. It generally involves you appealing to investors, such as financial institutions, corporate entities, venture capitalists, angel investors or even private individuals. Should they see the potential in your business they will offer you their own capital, so they’ll naturally want to know more about what your plans involve. Nevertheless, there are generally no usage restrictions involved in dictating how the funds are used - so long as it’s to your business’ benefit. Plus, because funding is based upon the level of interest and confidence investors have in your business, there’s also no limit to how much capital you could raise.

Plus, unlike using a debt finance agreement from a traditional lending institution, you’re not required to make monthly repayments to investors. This means that you can focus solely on tending to the needs of your business and ensure a reliable rate of growth. Should you require additional funds over time, investors may, yet again, be willing to you provide your business with more capital.

In addition, because they’re using their own capital, this also ensures that any investors have a vested interest in seeing your business grow. As such, investors may be willing to get involved in your business’ operations, lending you their skills, expertise and access to useful contacts. Their involvement could also prove invaluable in helping you make key business decisions and develop an effective strategy, allowing you to benefit their knowledge and experience.

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Disadvantages of Private Equity

Although this can be a great way of investing in the future of your business, there are also disadvantages to Private Equity funding which must also be taken into account. Firstly, acquiring Private Equity from investors can be a frustrating and time-consuming process. It requires you to put forward a compelling case for why they should invest, whilst also reassuring them that you possess the necessary expertise to carry your business to it's next stage of development. As such, lenders will want to know more about your past performance, cashflow forecasts, turnover, what market research has been carried out and what qualifies you and your team to drive the venture forward.

If your business is a unique concept that aims to exploit a gap in the market, they’ll also expect you to have carried out rigorous research beforehand. After all, just because you’ve found a gap in the market doesn’t necessarily mean that there’s a need or profit to be made from it.

Plus, although you’re not required to repay investors, any capital that they do provide will come at the cost of equity (shares) in your business. As a result, this will have a direct impact on how much influence you have, giving investors the ability to cast votes on key decisions. You will also need to establish a regular reporting system to keep investors up to date on how well your business is performing. This is why you must think very carefully about the amount of equity you’re willing to part with, whilst ensuring that you still retain a majority share. If investors decide to pull together, it could even lead to them appointing new management to drive the business forward in your place.

Finally, should any investors decide to make good on their return they could sell their shares to someone outside of your business. This might lead to someone with opposing views or a lack of sufficient experience buying into your business and having a say in key decisions. To avoid this, you could, instead, buy back their shares in your business. However, as your business grows, so does the value of their shares, making this a potentially expensive task to fulfill.

What alternatives to Private Equity are available?

Despite Private Equity being a useful way of raising capital for your business, you may not be comfortable with giving away equity to investors. Fortunately, there is another path available. Although funding from traditional financial institutions may lie beyond your reach, especially if you’re an SME, you could explore what the Alternative Finance Industry has to offer instead. The Alternative Finance industry is introducing a new generation of alternative business finance products to the UK lending landscape, allowing more businesses than ever before to gain access to the capital they need without giving away equity. This includes products such as Overdraft Replacement, Invoice Factoring, Merchant Cash Advance, Peer-to-Peer Lending and Asset Refinance. All you need to do is source an agreement that’s appropriate for your business.

Need help raising capital for your business?

In order for you to achieve your vision, having access to sufficient amounts of capital is a vital responsibility. You just need to figure out an effective strategy for how it can be acquired. Fortunately, there are a number of pathways available, including Private Equity. But if you don’t want to give away shares in your business, there’s no need to worry. The Alternative Finance Industry is reshaping the UK lending landscape, paving the way for a new generation of business solutions, suitable for a wide variety of purposes and financial situations. All you need to do is source an agreement that matches your needs from a lender you can trust.

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At Rangewell, we’re an Access to Finance specialist and have mapped over 400 different lenders to offer UK businesses an overview of more than 23,000 business finance products. Our services are completely free to use and we’ll also guide you through the entire application process. So if you’re looking to raise capital via Growth Equity Financing or any other form of funding in order to support your business’ development, apply for Business Finance today or find out more with Rangewell.

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