How Private Placement Debt Financing Works

Private placement debt is a competitive alternative to traditional commercial bank loans and is often secured by means of a properly drafted private placement memorandum.

Private placement can offer reduced transactional and ongoing costs since the debt is exempt from most of the extensive registration, and reporting requirements imposed by federal and state securities laws. 

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How private placement debt works

Private placements also offer the ability to structure a more focused and dynamic transaction. They attract a small number of sophisticated investors. 

A private placement permits through 144A bond offering offers a more rapid penetration into the capital markets, than would a public offering of securities requiring registration with the SEC.

To find out whether it is a sensible financing strategy, you must have a fundamental understanding of federal and state securities laws affecting private placements.

You need to be familiar with the basic procedural steps that must be taken before pursuing this alternative form of financing.

Have a good sense of your list of targeted investors, and a team of qualified legal and accounting professionals to assist in preparing the private placement offering documents. 

The private placement memorandum (PPM) is a document of securities offering that can also be used to seeking financing from family, friends, and angel investors. 

It can be used as a funding strategy to open a retail shop or restaurant, or for starting a sophisticated technology or software company.

The PPM enables a business to target qualified institutional investors using a set of offering documents required under federal and state laws. The terms of the offering will be established by the borrower in advance.


A higher degree of flexibility and ability to customize the transactional structure to meet the needs of the targeted investor.

The entrepreneur and advisors set and drive the terms (not the institutional investors or lender.

PPM investors are more patient and “vested” in your success than other types of investors.

Introduces entrepreneurs to the obligations and best practices in reporting to minority shareholders.

Speed of access to the capital markets.

Lower transactional costs than most other types of business financing.

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A private placement memorandum (PPM) is a legal document that describes a company’s background, the risks to the investor, and the terms of the securities being sold. 

The borrower has to determine the exact degree of disclosure, and factors affecting type and format of information to be included in the document. 

It is critical to remember that a business plan is not a substitute for a Private Placement Memorandum (PPM).


  • Loan amount: $1M to $500M+
  • Loan term: up to 3 years
  • Interest rate: 8 - 20%
  • Loan to value: up to 75% and higher in some instances
  • Underwriting criteria: normal requirements from a collateral lender
  • Credit: single asset, bankruptcy remote entity
  • Prepayment penalties: none after 6 months of timely payments
  • Due diligence fee: varies but the lender or investor underwriting group will outline it in a formal letter of interest
  • Points: 4 – 10
  • Closing: ranges from 10 - 45 days or more
  • Interest reserve: required


Be ready and have a hit list; you certainly don’t want to take the time and expense to prepare a PPM and not have a clue who to show it to when it’s completed. 

Prepare a list of targeted investors well in advance to make sure the offering is viable and to help your lawyers evaluate compliance issues.

Make sure the economic terms are attractive; remember that unlike a venture capital deal, in which the business plan is presented and then a term sheet is negotiated, the PPM offering is not intended to be negotiated at all. 

You must have a good sense of the attractiveness and fairness of the terms of the offering in advance of distribution of the document.

Find special benefits or rights for the investors; for early-stage companies, the only real appeal to investors is the opportunity to get in on the ground floor of what might be the next big thing. 

Your challenge is to find some special benefit or right to entice investors to invest in your business.

Do it right the first time; Investors don’t want to see a lot of waste, but they will expect to see a well-written and properly formatted document without typographical errors or poor grammar. 

They will ask for exhibits and other information to help them understand the business and the risks inherent in the offering.

Friend of a friend; remember that the offering is supposed to be private, not public. It should be people with whom you and your team have a pre-existing relationship. 

It should not be sent to a blind list of the wealthiest people in your area you know. Use your discretion and consult with an attorney if in doubt.

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