What Are the Different Types of Private Funding?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 16 May 2020
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"Private funding" is a term used to describe funding that comes from sources other than commercial lending sources. Typically, funding of this type is obtained from private investors or lenders who see potential in a particular project and are willing to provide the funding to manage the launch of the new venture and keep it going until it is able to produce enough revenue to become self-sustaining. Private loans may be provided to individuals and companies for a number of purposes, sometimes with rates and terms that would be difficult to obtain through commercial channels.

One of the more common examples of private funding is the private loan. This approach involves a lender determining to underwrite a loan to the debtor in exchange for repayment terms that are agreeable to both parties. A simple example of this type of loan situation is a short-term loan between two friends that allows the debtor to manage the purchase of a car. The debtor agrees to repay the lender a certain amount of interest on the total amount borrowed, broken down into a series of payments according to a schedule that the two parties draft together. An arrangement of this type often allows the debtor to make the purchase even if his or her credit is damaged and would not qualify for a bank loan.

As it relates to the start-up of a business operation, private funding takes the form of money that is committed to the venture by one or more private investors. In this scenario, the investors agree to provide the business owner with a certain amount of revenue during the early operations of the business, with the understanding that the company can reasonably be expected to turn a profit within a certain period of time. Once the company does develop a client base and is operating at a profit, the investors begin to receive payments on the principal and the interest associated with the funding. Those payments may be in cash only, or a combination of stock shares and cash.

Private funding may also involve lending arrangements between two companies. For example, this type of corporate funding may involve a vendor lending money to a client that is going through a temporary cash flow issue, offering relatively liberal repayment and interest terms. This strategy may be in the best interests of the vendor, since doing so will help ensure that once the customer emerges from the temporary financial issue, the volume of orders and the revenue realized from those orders will continue.

There are a number of reasons why private funding may be preferable to seeking some sort of commercial funding. At times, the more liberal repayment terms may be especially attractive. Lower rates of interest may also be the motivation. Depending on the type of situation involved, and the goals of both the lender and the debtor, a private funding arrangement can provide both tangible and intangible benefits for everyone concerned, with some of those benefits being impossible to enjoy with a commercial funding arrangement.

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