One of the biggest hurdles for a business owner is how to find investors for his or her business. This is especially true if you are in the early stages of being in business for yourself. It often seems no one wants to take a chance on a new venture.
But there are sources for investment capital that can be available at different stages of your business’s development. How you can use each will depend on the age of your business, they kind of business it is, and where it is you expect to take it.
Family and friends
This is the first, easiest place to find investors and maybe the only one if your business is just starting. You won’t have to go through a bank-type qualification process and they’ll often provide funds even if your business is brand new.
Advantages: No qualification is necessary and you can often get the needed start up capital quickly. They most likely won’t ask for an equity stake if the business does well, so once you pay them back the business is all yours.
Disadvantages: There’s probably no better way to destroy a family relationship or friendship than by borrowing money from them. If you pay them back on time, all is well; but if you don’t the relationship probably won’t have a happy ending. Best suggestion, if you go this route, is to have sufficient collateral or assets outside the business to pay off the family members or friends should the business fail.
Neal’s Tip – If your business is growing quickly, you may prefer to borrow rather than sell equity. If that’s the case, and you don’t want to go to your family, consider using a peer-to-peer lender like Lending Club to gather investments for your business.
Angel investors and Venture capital
Angel investors are investors who put up their own money to a start-up business in exchange for an equity stake in the business. Typically they invest in businesses that are already up and running (as opposed to brand new) albeit in the early stages. You can begin a search for angel investors at Angel Capital Association.
Venture capital is usually pools of money from groups of investors. Again, no brand new business investment, but a source if a business is up and running business wants to move up to the next level. Check out National Venture Capital Association. It’s a resource that can act as a starting point for your search.
Advantages: Both angel investors and venture capital are excellent sources of growth capital if your business is already up and running. Unlike banks and more traditional sources, they’re not interested in long track records so much as dynamic concepts and new technology.
Disadvantages: Neither is a likely source if you want to launch a business from the ground up. They’ll also look for something unique (likely to take off) about your business that offers potential returns that are well above average. You’ll have to have a strong and very detailed business plan to impress them. They’ll also require an equity stake in your business, which means you’ll be sharing any success with them, and possibly control as well. You must really know how much your business is worth before you go this route and with start ups, it’s often hard to tell.
Attorneys, CPA firms and Financial Planners
These can be backdoor sources of angel investors or venture capital, but they rate a discussion all by themselves. Here’s why: attorneys, CPAs and financial planners work with people who have above average financial capacity—many are even wealthy. They may have clients who are looking to invest in a business as a way to generate above average investment returns, which is especially true given today’s low interest rate environment.
Advantages: Since you have a local intermediary the task of matching up with investors is less daunting. It can also be less formal, allowing you to arrange either a debt situation, an equity stake or both.
Disadvantages: All the same that apply under angel investors and venture capital above, except that the investors are likely to be smaller and locally based.
Find a “Money Partner”
This could be the simplest option of all. You have a business or business idea and partner with someone who has the money to back it. In affect, you will be the operating partner, and the investor will be the money partner.
Advantages: Next to getting capital from family and friends, this will be the simplest way to raise funds. You’re dealing with one person, not a loan committee or a group of investors. If the partner understands the nature of the business and the amount of time realistically required for return on his or her investment, you’ll have more breathing room in the critical early stages of the venture.
Disadvantages: This arrangement is a partnership in the truest sense of the term. You will have to give up a substantial equity stake in your business, and since you’re giving it to a single partner, the potential for conflict is real. Eventually the partnership will have to end and untangling it could be complicated.
Banks or the Small Business Administration (SBA)
These are the more conventional form of capital for small businesses, but they aren’t investors—they’re lenders, with all that implies. SBA loans are government sponsored and somewhat easier to qualify for.
Advantages: Since you’re getting a loan there’s no equity stake being exchanged, the business will be all yours. If your income, credit, collateral and business plan are top notch, qualification will fairly easy.
Disadvantages: Loans for small businesses have never been easy to qualify for, and that’s even more true since the credit meltdown. Also, a loan will come with a repayment schedule that will have to be honored even if you aren’t making any money. A bank not being repaid can be as cranky and interfering as an irate investor or partner. And since banks are third party lenders, they’ll be less likely to give you the time you need to work through an issues that may come up.
You can use most of these sources depending on where you’re at with your business. For example, if you’re just about to begin your business, family, friends or a money partner would be the preferred ways to go. Once you’re business is up and running and showing promise, angel investors or venture capital may be the route, especially if the business is on a fast track. Once your business is established and mature, you may decide to get bank loans so you don’t have to give up equity and control.
Have you found other sources of investment capital for a small business?