How to Finance Your Business by Private Placement

••• Hero Images / Getty Images

The one constant in the life of your small business is the need for a cash infusion to jumpstart sales, expand into new markets, or continue to sustain growth. While there is a multitude of financing sources of funding available to small business owners, each source has its limitations and requirements.

For example, commercial bank loans are best suited for businesses that have been around for a while and have shown a steady stream of profitability that makes them safe bets. On the other hand, for new and growing companies, private placements are an attractive alternative.

What Is Private Placement?

The private placement, or private investment capital, is money invested in your company that usually comes from private investors in the form of stocks, and sometimes bonds. As good as it sounds, the majority of private placement dollars come from pension funds, investment pools, banks, and insurance companies.  

However, private placement does exist for the small business owner and is often less expensive and easier than taking your company public. And, in the United States, 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.

Benefits of Private Placement

  • High degree of flexibility in the amount of financing ranging from $100,000 to $10 to $20 million dollars consisting of combinations of debt, equity, or debt and equity capital.
  • Investors are more patient than venture capitalists, often seeking 10 percent to 20 percent return on investments over a longer term of 5 to 10 years.
  • Much lower costs than approaching venture capitalists or selling the stock to the public as an IPO (Initial Public Offering).
  • A quicker form of raising money than usual venture capital markets.

Who Is a Candidate for Private Stock Offerings?

The ideal small business candidate is a company that's in the third stage of finance and is looking for growth or expansion funding. Small business owners might think private placement applies to start-ups when the company has completed product development and conducted a market-feasibility study and business planning but start-up funding often comes from angel investors.

Where You Can Find Private Placements

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

  • An individual earning $200,000 per year
  • A household with an income of $300,000 per year or a household with a net worth in excess of $1 million dollars
  • Venture funds, some banks, and other institutions

To find these private placements, connect with bankers, attorneys, and accountants who can network your small business with the right private investor.

What You Need for a Private Placement

  • You need a sound business plan.
  • You should have a private placement memorandum (PPM) disclosing the full facts surrounding the investment and business.
  • You'll need a law firm or lawyer that's experienced in private placements.

With the limited infusion of capital into the stock market, the private investor market is an attractive alternative for investors and small businesses. Private placement offers a viable form of business financing without the constraints of taking a company public and conceding control.

Edited by Alyssa Gregory