A typical Private Limited Company is the one that is owned by a small number of shareholders/members either by non-governmental organizations. In India, the Corporate Affairs Ministry is the governing body for the Private Limited Company.
The private company registration is a highly favorable option amongst the upcoming entrepreneurs because of its unique elements, such as easy preparation, minimum requirements of two members, limited liability, etc.
However, the private limited company’s biggest downside is that it cannot sell its share/shares in the stock exchange to the general public. Instead, private shares in limited companies are owned, marketed, and traded only privately. Since the general public is not permitted to invest in a private limited company, investors would find it much easier to invest in a public company.
The present article helps the reader to understand the following
- First of all, it has necessary points that one should take into account before investing in a private limited company;
- Secondly, it presents various ways through which private limited companies can be financed.
Three key points to be considered before investing in a Private Limited Company –
Any investor ready to pay their funds generally has a goal behind their investment –
Earning return (can be in any form, such as interest, dividend or appreciation);
the security and security of the principal amount;
Easy liquidity (i.e., easy investment conversion in cash as required).
To be able to choose investments in a private limited company, investors should bear in mind the above investment goals –
A. Expecting the returns from private limited company investment
Considering that the investors are willing to invest in a start-up company, he/she is likely to invest in the initial business phase. This is because the investor is willing to invest in an already established company.
Share investment can lead to higher returns. Investment by debentures or loans leads to average returns.
B. Safety control of operations of the principal amount
This holds for the investor who chooses to invest through the purchase of shares in a private limited company. Such investing shareholders may have voting power, leading to some control over company operations and decision-making. However, investing in shares can lead to higher returns, but comparatively low security for the principal.
Whereas if the investor invests in debenture acquisition or the form of loans and advances, the return is average. Simultaneously, the security of the principal is higher.
The option can, therefore, be selected depending on the need/requirement of the investor.
C. Low share liquidity
The liquidity of shares is one of the critical points considered before investing in a private enterprise. As we know, the Private Limited Company shares are not available to the public, which leads to low liquidity of its shares concerning the Public Company.
Therefore, it is recommended that only the extra/excess amount is invested in the private limited company, as the ratio of the conversion into cash would be uncertain on demand.
Possibilities for the third-party to invest in a Private Limited Company –
The private limited company holding shares –
As already mentioned, the general public cannot be invited by a private limited company to subscribe to its shares. The private limited company may, due to the restriction, raise its capital only by private arrangements, i.e., from its members, directors, or families.
The person prepared to invest in a private limited company through shareholding must contact the company’s promoters or managers.
Debt investment is considered to be one of the safe routes for private limited company investments. There are two types of debentures – convertible and non-convertible.
The convertible bonds combine equity and debt advantages. Also, the investor has an option to convert the debt into equity. The return on convertible debentures would, however, be average.
Non-convertible debentures, on the other hand, provide greater returns without any conversion option.
Loan & Advance investment – Investing
The easiest way to invest in a private limited company with average returns and full capital security would be to invest in loans and advances. The investor would receive regular interest returns.
Other Various options
If the investor doesn’t want to take any of the above options, options like a venture capitalist, angel investors, etc. Investors can also invest in the Private Limited Company with this option.
The options mentioned above and tactics are the basic ones for the investors to get their share in the private limited company. Remember, there’s more to stake than just the share when you invest in a private company. The valuation of business over time makes a lot of difference depending on how the business fairs post investments. That’s why investors choose the best possible ways to guarantee a better return once the investments are made. Most of these investments will demand a split share on brand value rather than the immediate profits as the latter keeps the company fueling in tough times.