At some point during its' lifespan, most every business anywhere in the world today is going to need an infusion of cash, or some type of commercial financing. The reasons for this assistance can be as varied as business itself, from inventory financing to leasing a fleet of vehicles to acquiring additional warehouse space. So where do the owners or principles of these companies go to acquire these needed funds? There are actually several avenues of financing that are common in business today.
Commercial finance lenders include commercial banks, mutual companies, or private lending firms. These institutions are usually the first stop for most businesses in need of capital financing. Commercial lenders often will offer "asset-backed financing", wherein the funds lent to the business entity are backed by some sort of collateral, such as a percent of Accounts Receivables or a loan against inventory on hand. Typically, these loans are facilitated through the use of a "broker", who brings the two parties together. Often, the broker will be able to provide the business owner access to lenders that they may not have been able to access otherwise. Commercial lenders provide the business in need with a great deal of flexibility, such as "bridge loans" or "balloon payments". The cost of these options is usually reflected in higher interest rates when compared to a traditional bank loan.
Private equity firms provide financing for different types of activities, including leveraged buyouts, venture capital, or growth capital. They differ from commercial lenders in the fact that often, they take a position in the company they are lending funds to. They seek to acquire a controlling or substantial minority position in the company, and sometimes get involved with the day-to day operations of the business. The private equity firm seeks to make money on its' investment by realizing cash returns either in the form of an IPO (Initial Purchase Offer) sale or the companies' eventually being sold off to another owner group or competitor.
Venture capitalists provide funding to early-stage, high potential, high risk operations start -up companies. Venture capital firms tend to lend money to companies that are producing a new technology, have a unique position in a market, or have a unique business model. Like the private equity firm, the venture capitalist is looking to take a stake in the companies' ownership and decision-making. Venture capital is an attractive option for a smaller company that is too small to raise capital in the public market (IPO), and cannot secure a traditional bank loan. These lenders tend to be very particular with their investment selections, typically reviewing hundreds of opportunities before finding an opportunity they may invest in, hence their nickname, "angel investors". Venture capital firms can assist at all stages of a companies' growth, from start-up to exit from the market.
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