Each and everything has some pros and cons, so it is essential to know about both aspects. Like other things, private placement also has some advantages and disadvantages. So, if you are using this way to raise capital, you must know the Pros & Cons of Private Placement. All related activities like issuing/offering and equity securities are done between the issuer and investor in selected numbers; however, it may be one in number.
What is private placement?
When a business makes its corporate bonds or shares available for any investor (or sell them but not for sale on the open market), it is called private placement. These investors can be anyone, either an individual with a high net worth or any insurance company.
Advantages of Private Placements
Long Term –
In comparison to others, private placement has a more extended maturity period. The maturity period includes a fixed interest rate. This is the best option for those running a business and expecting rapid growth in the future but not currently. So they would have long enough time to pay back the private placement. It also provides a good relationship bond with the investor due to the extended maturity period. Both public and private companies issue private placement for different purposes.
The most important advantage of private placement is its flexibility. Debt securities of private placements are the same as bank loans or bonds, which can either be secured or unsecured. Along with senior debt, some other types of debt are –
- Subordinated Debt
- Term Loans
- Revolving Loans
- Asset-Backed Loans
- Shelf Issues
Choose Your Investor –
The private placement allows you to choose an investor according to you. It helps you to find the investor with the same objective and thought process. Such an investor can help you in business growth and long term future goals.
Disadvantages of Private Placement
Along with huge advantages, some disadvantages are also thee –
A Limited Number of Potential Investors –
Sometimes it becomes a challenge to find potential investors. Not every investor wants to buy your business bonds and be interested in making a relationship with you.
Reduced Market –
There is one more advantage in a private placement which affects the as a whole. A reduced market makes a significant impact on shares and bonds for the long term.
The private placement allows you to retain a private company, so you no need to go public for fundraising. As it has lots of advantages so most startups, businesses prefer private placement for raising finance. Yeah, there are some disadvantages too, but it can compensate for a large number of advantages.