If you are looking for alternative funding because your traditional lender couldn’t or wouldn’t extend you the capital you need for your business, you might have heard about private equity financing. Although many business experts tout this type of funding as the best alternative, the truth is it has pros and cons just like any business finance opportunity. It’s important to understand both before making a decision.

The Advantages of Private Equity

Private equity offers several distinct benefits over other funding options. Perhaps the most important is the ability to secure large amounts of capital. Some private equity deals are for hundreds of millions. While it isn’t likely your small business needs that much capital, it does show it could be easier to get what you need if you go the route of private funding.

Unlike traditional lenders, which don’t invest their own money into your business and therefore don’t care if it succeeds, private lenders often invest their own wealth into your company. This gives them incentive to help you succeed, meaning you usually have someone helping you in the background.

Finally, private equity often leads to higher returns. Many business owners who choose to go the route of private equity financing find their company’s annual profits grow, some by as much as 50 percent in a year.

The Disadvantages of Private Equity

Private equity financing has its disadvantages. Private lenders invest their own money into your company. Because they do this, it means they usually want a say in how you run things. While some people welcome this type of interaction and consider it a mentorship, others don’t want to share their operation strategies with lenders and especially don’t want to make changes to it based on a lender’s opinion. For this reason, be sure you are willing to work so closely with a lender before deciding to use this type of funding.

Unfortunately, if you don’t run the right type of business, private lenders might not be interested in your company at all. Most of them are interested only in specific industries such as technology or other industries that prove consistently high in performance and profits.

After weighing the pros and cons, if you’ve decided private equity financing might be right for your small business, you should begin to get in touch with such lenders. Your attorney, accountant or traditional lender can likely provide some leads for you. Keep in mind these types of partnerships often build over time, so be sure to seek out lenders long before you actually need the capital. Private equity lenders are not a quick fix if your business is in a financial emergency.