Originally published by Forbes, featuring Frank Williamson.
We’re grateful to Forbes for the opportunity to contribute to this important conversation. Read the full article below.
Any business that grows large enough eventually reaches a point where it needs outside capital to keep expanding. For owners, picking the right capital provider is a major decision that can shape the future of their enterprise.
Typically, the two big capital sources are debt and equity financing. The vast majority of businesses (86%, according to the Federal Reserve’s 2026 Small Business Credit Survey) regularly use some kind of debt financing from traditional banks or online lenders, be it through credit cards, term loans or lines of credit.
Short-term debt options can help bridge a temporary cash-flow shortfall caused by seasonal swings, an emergency or, more recently, tariff-related cost challenges. Meanwhile, longer-term loans offer the advantage of temporarily transforming an illiquid asset, such as inventory, equipment or real estate, into liquid capital that can fund an expansion or new opportunity. A business’s assets serve as collateral and secure its obligation to repay the loan while keeping the bank at arm’s length, limiting its involvement to providing and collecting debt.
There are a lot of good reasons for businesses to borrow money instead of pursuing private capital. Because it’s a simple transaction with an end date, a debt obligation doesn’t carry the same long-term weight as an equity investment. In exchange for private capital, a business owner is essentially selling part of their business and, for the foreseeable future, entering a partnership with another party that has partial influence over the company’s management and shares in its profits and losses.
For some smaller businesses, private capital isn’t even a particularly realistic option, since angel investors—the most common sources of more modest-sized investments because they don’t have minimum deal size requirements—still gravitate toward enterprises with scalability potential. By contrast, larger investment funds need their investments to be over a certain size to justify the time and effort of structuring the deals, monitoring the companies and selling them to their next owners.
Some myths about private capital persist for small-business owners, especially around what an investment actually means for a company. Owners often assume that they’ll suddenly receive access to the accumulated wisdom of more experienced entrepreneurs. However, equity investors are typically looking for businesses that are already self-sufficient and able to solve problems independently, and the way they judge success is through profitability.
Types Of Equity Investors
For certain kinds of companies with certain liquidity needs, equity funding may be the only viable option. Those businesses typically seek out one of four types of private capital investors:
Angel Or Venture Capital Investors
These financial backers provide capital to help a company grow rapidly. The money might fund sales and marketing, product development or another operational priority that’s directly tied to making the company more profitable over a short period of time. An example of a successful investment would be an enterprise that grows 10 times within three to four years, enabling it to be sold to a larger company.
Growth Equity
This type of investor usually enters the picture once a company is already profitable and has reached maturity. Growth equity investors receive a minority interest in the company in exchange for their funding. They’re also seeking rapid growth culminating in a sale, though maybe at a slightly slower pace—a five time increase in value over three to four years would be considered successful.
Buyout Investors
These investors are seeking companies with a reliable level of cash flow, as well as the ability to grow further. They’ll likely want to buy a majority of the company using bank debt, which they’ll pay off with the company’s future profits. Buyout investors usually look to exit in roughly five years, by which point they hope to have boosted the company’s value by two or three times through increased sales and additional acquisitions. Ideally, the company would be sold to a larger company in the same industry.
Another Company
Sometimes, the best way forward for a small business is to sell to a larger company in the same industry, which is typically owned by a private equity firm. This move takes the focus away from the small business’s own future growth, since it will be absorbed into the larger company and play a role in its wider strategy, often by offering a new service or product.
Making Your Case
Whether pursuing a bank loan or private capital, the first step for small-business owners is to do their homework. The burden of proof is on you to convince a bank or investors that providing capital is a sound financial decision.
A loan officer’s job is to assess risk, so they’ll be looking for a detailed plan for how the borrowed money would be repaid, as well as historical financial statements, a cash flow analysis, specifics about other existing debts and other financial details. Equity investors have a different focus: They’re trying to determine a company’s growth potential and future value, so they’ll want to see, among many other things, financial projections for the next three to five years, the business’s organizing documents, competitive positioning and an exit strategy narrative.
Owners shouldn’t over-rely on salesmanship. Much of the information a lender or investor needs to decide if there’s a fit should already be laid out. Sometimes a capital provider is simply looking for different characteristics from a prospect. If an owner has created multiple opportunities, receiving a “no” for an answer shouldn’t hit too hard.
The most important thing a business owner can do as they look to finance their business is to demonstrate trustworthiness and honesty in their dealings with potential capital providers. If a particular bank or investor isn’t the right match at the moment, preserving the relationship is important in case the situation ever changes. And if there is interest, leading with integrity helps provide the foundation for a harmonious working relationship.