Since the 2008 financial crisis, bank financing has been trickling out, and many companies have been forced to look for alternative financing options. And now, with monetary policy normalizing to curb rising inflation, leaving interest rates at 4% (after the latest hike in June), loans have become more expensive.
Fortunately, this gap is being filled by a range of investor types that have become levers for driving SME growth. From private equity firms (previously known in Spain as “capital riesgo”), venture capital, and business angels, to domestic and international investment fund structures created ad hoc to invest either in equity or in debt (direct lending), as well as traditional family offices.
Private equity
These are private capital firms that provide capital directly to SMEs to boost their growth. Their key elements are:
- Investors: previously known in Spain as “capital riesgo,” these are firms specializing in providing financial resources on a temporary basis (5–10 years) in exchange for a stake in unlisted companies.
- Objectives: they invest in companies with EBITDA above €2 million and long-term growth potential, whether through professionalizing the company, sector consolidation, international expansion, and so on.
- Management: private equity firms usually play an active role in the management and leadership of the SMEs they invest in, improving processes in order to earn a return on their investment once they exit.
Venture capital
This option focuses on investing in emerging businesses with high growth potential. Investors provide resources in exchange for equity stakes in the early stages of these companies' development. Here are its main features:
- Target companies: venture capital focuses on growing companies that are just getting started. They usually have significant prospects for expansion.
- Investment stages: it can get involved at the stage where the company's initial development is financed, the stage where it seeks to expand, or the stage where the business is growing.
- Risk and return: It involves a significant level of risk, since early-stage companies carry a logical risk inherent in their very nature.
Business angels
This is similar to the previous option, since the investors also provide financing to early-stage companies. The main difference is that they're usually successful entrepreneurs, high-net-worth private investors, or experienced executives.
- Target companies: it's aimed at companies in their early stages and therefore involves a high level of risk. Investors take it on in exchange for high returns if the company succeeds.
- Investors: they're high-net-worth individuals with extensive business experience. In addition to providing financial resources, they also share their knowledge.
- Involvement and support: they offer guidance and advice to the companies they invest in. They make their experience in business management, product development, sales, and more available to them. They also open up the valuable industry connections they have.
Family offices
This involves the financial management of private wealth. The key features of this type of financing are:
- Family ownership and management: family offices are set up and run by wealthy families to manage their assets. They can be owned directly by the family or can hire outside professional financial firms.
- Long-term focus: they focus on growing wealth over the long term rather than seeking short-term returns. Their strategies preserve the family's wealth across generations.
- Access to exclusive investments: they usually have access to investments that aren't available to retail investors. These can include private equity, hedge funds, real estate, and more.
Investment funds
These are collective investment vehicles that raise capital from multiple investors to invest in a wide variety of financial assets. They're managed by professionals in the field and offer the opportunity to diversify investments and access assets and markets that would be very difficult to enter otherwise. Many funds are raised ad hoc to invest in specific SMEs. Here are the two types of funds that invest in companies:
- Equity: Also known as private capital funds or company investment funds. They focus on providing financing to unlisted companies at different stages of development and in different sectors. They raise capital from institutional investors, insurance funds, or high-net-worth individuals and invest it in companies with high growth potential. They're investors with a long-term horizon, from 7 to 10 years, seeking double-digit returns. Unlike private equity, they don't necessarily take part in managing the portfolio company.
- Direct lending: this is a form of leverage outside traditional bank lending. These firms raise capital from investors to provide loans to different companies. These loans are usually structured and tailored to each company's specific needs, with all the advantages that brings. They aim to generate attractive returns for their investors.
As you can see, there are several ways beyond banks to obtain alternative financing that can help you grow.
