If you want to attract sound capital investment you need to make sure your business is investment-ready. You also need to understand how investors operate, because this will help you to find financial backers that are right for your business. There are two main types of capital investment:
- private equity finance - where investors provide funding in return for shares in your business that are not listed on the stock exchange
- debt finance from financers who provide capital in return for repayment with interest at a later date - eg banks
Differences between private equity finance and bank loans
Banks have a legal right to charge interest on a loan, and to demand repayment of the loan by a specific date. This is the case whether or not your business succeeds once you have taken out a loan.
Banks usually require you to secure your loan against business or personal assets - such as your home - which could be extremely risky if your business does not succeed - see bank finance.
However, private equity investors do not have these legal rights to interest and capital repayment, so the only way they can get their money back is through a capital gain if your business succeeds. They will want to take out more than they invested when they exit from your business.
Therefore, they look for high-growth potential businesses to invest in, and are likely to be more hands-on than banks. They can also often bring useful expertise into your business - see equity finance.