The Difference Between Private Funding and Public Funding

Business Funding

Public funding comes from a publicly funded agency such as the state or federal government. Public funds are not used for private funding. Depending on the organization, private funding usually consists of gifts and grants. When the funding comes from the government for a specific project, the money is from either public funds or taxpayer contributions. There are numerous positive aspects regarding public funding. This type of funding often involves a venture capitalist, an angel investor or a small investment group. Private investing is more flexible for the business because there are no regulations or rules other than those included in the original agreement. The reason private investors invest is usually because they are passionate regarding the vision of the business. This generally establishes a strong bond.

The Five Top Benefits of Private Funding

The majority of entrepreneurs turn to private lenders to establish or grow their business. Traditional channels such as banks and governments have a set criteria regarding funding. The process is more complicated, requires a much longer period of time for approval and numerous start ups are refused. For these reasons, many businesses prefer to deal with private lenders.

Increased Funding

The amount of funding necessary varies from business to business. Private channels often provide more funds than traditional lenders. This is because the company’s stock is sometimes purchased for a higher amount than the current trading value. A good example is a business with stock trading at twenty dollars per share. A private lender may offer thirty dollars for each share.

The Equity Capital

Traditional funding is classified under the heading of debt capital. This means the business will accrue both interest and debt once they accept the capital offered. Depending on the size of the loan, the interest can be significant. The term used by private lenders is equity capital. This is different because instead of charging interest, the investor acquires a portion of the business. This often helps the business grow because there is no loan to be paid back.

The Investor Involvement

In many cases, the private investor will become involved with the business. When a loan is issued by a bank, the only assistance they provide is with the financing. A private investor has invested because they believe in the business and want it to succeed. They often offer guidance and different types of assistance to help the business achieve their goals. This can be helping the business hire additional staff, purchasing machinery, assistance with working capital or refinancing any current loans to decrease the monthly expenses.

Shorter Approval Periods

One of the most common reasons a business will choose private funding as opposed to traditional funding is the approval process usually takes a lot less time. This is because private investors do not have to go though the same tiers to reach a decision as the traditional sector. The investor decides if they want to back the business. If the business requires capital quickly, receiving the funds faster is often critical.

The Approval Process

It is easier and faster to receive approval from private funding. The credit history of the business is scrutinized by a traditional lender. The smallest detail may cause the lender to determine the business will not be able to pay back the loan. This often leads to the loan being refused. Although private lenders review the same information, their emphasis is placed on the business itself and the projected revenue. If an individual wants a loan to establish a new business and has a solid idea, the chances of being approved for private funding are excellent.

The Importance of Working Capital

The most important component for the financial stability of any business is having enough working capital. A lack of working capital will negatively impact the future of the business for entrepreneurs, brick and mortar businesses and for developers. The main reason a business applies for funding is to ensure they have enough working capital to enable their business to grow. A loan provides enough capital to cover any gap left between customer orders and the payments to the suppliers. This is especially true for newer businesses. This funding allows the business to explore new opportunities, invest in new services or products, cover the daily expenses and meet unexpected costs. This is often essential for the dry periods common with seasonal businesses.

Starting a New Business

A startup business requires funding. Some businesses have their own funds, but few have enough money to fund the company until it becomes profitable. The majority of business will look for external funding. This money is used for everything from hiring the staff to the marketing to the stocks. The biggest issue with traditional funding is it often difficult to acquire for a new business. A detailed and smart business plan will often be approved by private funding. The business must have the necessary supplies, machinery, vehicles, etc in order to succeed. A loan is often required to fund these types of purchases.

The Established Business

When an established business decides to expand, they usually require funding. This can be to expand a fleet of vehicles, purchase new IT or office equipment or additional land. The business may need to hire additional employees, update machinery or improve their production capabilities. Private funding is the best alternative provided the business is stable and the expansion plans have been well thought out and prepared. The biggest difference between traditional and private funding is the traditional funding process is more concerned with numbers, history, credit scores and mountains of paperwork. Private funding concentrates on the person running the business, the business itself, the profits and the future potential for the business.

Debt Restructuring

Private funding is an excellent way to restructure debt by obtaining a loan to consolidate financial loans, interest and existing debt. This makes it much simpler to keep tract of monthly payments and ensure these payments are made on time. Refinancing is a good way to increase the growth rate of a business by making additional cash available.