Investment funding structures for private business is much like a smorgasbord of options. The choice of these options is depending upon a number of factors which we will get into in a future educational post. For purposes of this post we will examine the different funding structures only and not the strategy of uses.

 

Depending on the stage of the company in its business cycle, the financial position, valuation and usage of funds being requested all go into determine which structure you may choose to provide the request project funds. It is critical you match the company, its fund request and usage of the funds with your investment criteria to select the right funding structure. More to come on this!

 

Loans

One loan structure is funding via a either a secured or unsecured loan that can be crafted with many rights and privileges benefiting either the lender or the borrower. It matters not whether the loan is a secured loan (collateralized by assets) or unsecured (a signature loan) regarding whether or not you add rights or privileges or the types of rights and privileges added to the loan. You can be very creative when the need arises with loaning money.

 

Debt

One might think the a loan and debt or the same but they are not. Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. A loan is a form of debt but debt is different than a loan.

 

Loan and debt, both link to the term money. Basically for a common man, both are liabilities that need to be paid off. So, the difference between 'loan' and 'debt' is that money borrowed from lender and bank is called loan, and money borrowed through debentures and bonds is called debt.

 

A debenture contains positioning over the whole assets of the company for collateral where a loan is typically used to secure one asset. This structure is the preferred selection of loan when the value of the loan is very large and is being used for more than one asset purchase. It too can have rights and privileges just like described above under loans.

 

Equity

Common Stock

Equity is an investment structure used to combine ownership with investment. Funding a company through equity ownership is basically an exchange of investment for stock and the ownership percentage (number of shares being purchased) and the value of the stock (the value that determines how much stock you are acquiring) is a part of negotiating your investment. There are some conditions of valuation that needs to be considered in negotiating your structure but this will be discussed in a later educational piece. Investing through common stock you can add warrants to your investment attached to each share of stock you purchase. Warrants and options are mainly the only two additional features you can add to common stock purchased investment.

 

Preferred Stock

Preferred stock (also called preferred shares, preference shares or simply preferreds) is a form of stock which may have any combination of features not possessed by common stock including properties of both equity and a debt instrument, and is generally considered a hybrid instrument.

 

There are many rights and privileges that can be added to this class of stock and this class of stock typically deals with more sophisticated investments. For purposes of this education piece, we will only identify this class of stock as a potential funding structure for you to study and learn through other educational pieces.

 

And as indicated for certain types of funding engagements you may want to use grants and endowments. While these are typically used for humanitarian projects they do have a place in private business as well.

 

Just like with humanitarian projects, selection of your funding structure is critical to balance your investment criteria, the business being funded, the amount and usage of the funding and your risk tolerance level over your investment.