Business financing options - an overview

Venture capital (VC) funding is a form of private equity investment, where a business obtains long-term funding in exchange for a share of its equity.

VC funding is mainly sought by start-ups or new businesses with high growth potential. Companies can also use it to expand, fund management buy-outs or buy-ins, or develop new products.

Private equity (PE) funding is a general term for investments in private companies - usually financed from a fund set up by big institutional investment firms.

Venture capital (VC) companies draw on private equity funds to invest in new businesses with high growth potential, eg technology start-ups. In exchange, they take part of the business' ownership, making a profit when they sell their stake and exit the company.

VC investment criteria

VC's typically invest in businesses with:

• a minimum investment need of around £2 million, though smaller regional VC organisations may invest from £250,000
• an ambitious but realistic business plan
• a product or service that offers a unique selling point or other competitive advantage
• a large earning potential and a high return on investment within a specific timeframe, eg five years
• sound management expertise - although VCs tend not to get involved in the day-to-day running of the business, they often help with a business' strategy

Before you approach a venture capital (VC) business, you should research what sort of private equity (PE) funding would be best for your business needs. Different types of investment, for example, seed funding, product development and succession funding, are suitable for different stages of business development.

When choosing a VC fund, look for:

• funds targeting your business sector
• investment criteria
• quality of advice and support provided by investors
• amount of finance - some PE firms specialise in investments below £100,000
• geographical location of PE investors and how near they are to your company

For further information see venture capital.

Watch this video tutorial which outlines the common sources of funding for businesses, including bank finance, equity finance and government grants.