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The Role Of Institutional Investors In The Market Today

Aug 17, 2007
Institutional Investors refer to the group of financial organizations, such as investment companies, endowment funds, depository institutions, insurance companies, pension funds, or high net worth individuals who invest in companies and businesses and fund their start-ups.

There are two ways institutional investors finance businesses: equity funding and debt funding.

Equity Funding Mode
The majority of businesses prefer the equity-funding mode. Such funding is provided through the venture capitalists or institutional risk takers, who could be large financial institutions or high net worth individuals. Such investors constantly look out for start-up businesses where they can invest their money. They prefer to invest in at least three to five year old companies that posses the potential of becoming large national players in the end. Such venture capitalists check several potential investment options annually, but may choose to invest only in a few of them.

The venture capitalists may choose to participate in the management strategies of the company, in which they have invested. They generally play a passive role in that company's management. However, they are free to react if they do not find certain things in the management worthy from the investment perspective.

Generally, the venture capitalists do not prefer funding start-ups and financing companies in their early stages, as the level of risk associated with such companies is often high. However, there are exceptional cases, wherein, the entrepreneurs have obtained such a funding pattern, if the companies have a proven track record in the business where they operate.

Debt Funding Mode
Debt financing is generally done through banks and is common for funding start-ups in case of small companies. Banks offer products such as short-term loans, single-purpose loans, and seasonal lines of credit to meet the financial requirements of the small companies. The banks issue such products to the customers against their personal guarantees. The lender uses the collateral, in case, the borrower defaults in repaying. Banks do not prefer to give loans for start-ups or any other purposes on a long-term basis to small companies.

Securities Offerings
Producing genuine securities offerings before the investors while seeking for their investments is a must. Otherwise, your company may end up violating the Federal and State Securities Laws, which could have disastrous consequences.

Research the market well for the right contacts of private capital before structuring any deal. Check out the contract options available in the market carefully. The most popular options are royalty financing contracts, preferred stock, and short-term mortgage loans that have a tenor of three to four years.

It is advisable to enter into a contract with a trusted entity for fulfilling the securities offering procedure for the company in order to ensure the firm's safety. Such a contract ensures that you, as an issuer, are not liable for any violation of regulatory compliance.

Additional Help
There companies online that can help you obtain financing for your small business. These include consulting firms that are geared toward helping you achieve your dreams.
About the Author
David Gass is President of Business Credit Services, Inc. His company publishes a free weekly e-newsletter on Small Business Consulting at their web site http://www.smallbusinessconsulting.com.
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