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- Riley Draper
Starting a new small business can be incredibly exciting, but it also takes a lot of work and, in general, quite a bit of start up capital.
You might feel like you are unable to start a business because you do not have the required finances readily available, but its important to remember that there are a variety of ways that you can get funding for your small business venture that do not include shelling out the total startup cost from your own wallet.
In this article, we will go over some of the best ways that you can get investors for your small business, so that you can start taking one of the most important steps in your entrepreneurial journey: financing your small business.
Important Questions to Ask Yourself Before Looking for a Small Business Investor
Before you even start looking for ways to finance your small business venture, there are a number of questions you are going to want to ask yourself about your own capeabilities and preferences, as well as about your business. We’ve elucidated some of the most important questions to ask yourself below:
1. Do you have a comprehensive business plan?
To get investors, you need to go beyond the initial business idea. Investors want to know how you plan to continue to grow and increase the revenue of your small business. Specifically, they want to know how you are going to use the money they invest and how they are going to recoup their investment or otherwise benefit from lending your business money.
In other words, investors are not charities, and they want to know exactly how they are going to get something back in return for their investment. To ensure that you are able to satisfactorily convey this essential information to potential investors, it is important that you come up with a comprehensive business plan with clearly outlined goals and well-researched projections.
Within this plan, you should also clearly lay out how you are going to use the investors investment, and how and when they should be able to expect a return on that investment.
2. Do you want a partner?
This is an important question to ask yourself when looking for investors and will ultimately help determine what kind of funding you decide to pursue. Many investors will want to be partners in your new business. This means that you will not be the only voice with power to make decisions.
Before looking for an investor, you should ask yourself if you are comfortable sharing decision-making power with another person, or in the case of more than one investor, with multiple people.
3. Do you really need investor capital?
This is one of the most important questions that you must ask yourself. Securing investor capital can mean great things for your business, such as expansion, increased production, improved equipment and software, and the list goes on. However, investor capital does typically come with a number of compromises and responsibilities, of which shared ownership is a common example.
So, although this might seem like a question that might be too obvious to ask, it is nevertheless one of the most important, and you should have a clear answer to the question before you decide to look for investors or not.
4. How confident are you in your networking skills and resources?
Finding the right investment partner can take time and hard work. Most investors are warry of investing in a business owned by a total stranger. For that reason, you will want to be prepared to spend time meeting and forming connections with prospective investors in the business community.
Networking is important for both you and prospective investors, since it allows you and the prospective investors to develop relationships and determine whether a partnership will likely be fruitful. Moreover, networking does not just include face-to-face meetings but can also be facilitated on social media platforms like LinkedIn.
5. Does your business offer a clear, unique, and profitable service or product?
It is very important for investors to know that their investment will be protected and that it will be likely to turn a profit. For that reason, you will want to ensure that your business plan includes an industry analysis which shows how your business fits a niche and demonstrates that your product or service will be successful in the marketplace.
Incentives for Investors
When someone invests in a business, they are often taking a considerable risk. Because of this, investors generally want to ensure that they are getting something in return for their money investment in the form of financial rewards. These financial rewards are typically referred to as investor incentives or investor motivators.
Below, we list some of the most common investment incentives that you can use to help attract investor capital for your small business.
1. Equity Shares
In return for their investment funds, investors will often receive an equity share in your company. An equity share, normally known as ordinary share is a part ownership where each member is a fractional owner and initiates the maximum entrepreneurial liability related to a trading concern. Ultimately, equity share owners will get a percentage of the funds if the company is sold or liquidated.
2. Business decision making power
Often, one of the best incentives for investors is the possibility to share decision making power with regards to the workings of the business. Not all investors will require this, but it is typical of those investing in equity shares to expect a certain amount of decision making power.
3. Concrete exit strategy (Initial public offering (IPO) or eventual sale)
Many investors are looking to invest in businesses that are highly scalable and have the potential to ultimately be purchased by a larger company or firm or to go public. This is especially the case if your business is looking for a significant financial investment. When dealing with smaller investment amounts, there may not be an expectation of an IPO or a business sale in the near future.
Sometimes investors can be motivated by a desire to mentor your and help bring your small business venture to success. Of course, they will also have a financial incentive if they have invested, but it is always important to remember the human element of business.
Your investors may also have professional and financial connections that can help your business grow. The level of their involvement will vary by the type of investor as well as the personality of that individual or the approach of that investment group.
Its not always just facts and numbers, and ultimately, forming connections and relationships with people who are established in the business community are great ways to get capital investment in your business and, what can be just as important, sage advice from people who have gone through the trials and successes of entrepreneurship and are now ready to give back.
Types of Investors and Sources of Funding for Small Businesses
When looking for people to invest in your business, you should be aware that there are multiple types of investment opportunities out there. Your financial needs will vary depending on your business’s current stage of growth.
While the types of investors listed below can provide funding at any point during your startup journey, some are more suited for pre-launch and early stages of growth, while others may be more beneficial in later stages of increased scalability or as you prepare to sell your company.
1. Family and Friends
Often, to find the best people to invest in your business only requires that you take a look at your inner circle, especially if some people in your inner circle have a sizeable net worth. For many small business entrepreneurs, friends and family can be a great source of investment.
However, just because the person potentially investing in your business may be a friend or a family member does not mean that you should take the business plan stage any less serious. Even inner circle investors will want to know why your business plan is profitable and how you are going to use the money they have invested to further your business goals.
Moreover, it can be highly rewarding if you can get a family member or friend investor a great Return on Investment (ROI), while, on the other hand, the nature of the highly personal relationship may cause serious problems if the business ends up underperforming or failing.
Whether or not an inner circle investor is a good choice for you and your business will largely depend upon your circumstances, preferences, and business goals. And if you are someone for who a inner circle investor would be unrealistic, then do not worry.
There are many people in the same position, and luckily, there are quite a few other options when it comes to finding investors for small businesses.
2. Peer-to-Peer Lenders/ Personal Investors and Private Investors
A peer-to-peer lender or loan is when an individual or group invests in a business directly, without the help of a middleman, such as a bank or investment firm. These lenders connect entrepreneurial borrowers directly with investments through a brokerage website that will set the rates and enable transactions between both parties.
Often, this kind of loan is a good funding option for those inner circle loans that we talked about above, but they are not necessarily from your inner circle. Through networking efforts, you may very well be able to find someone or an association of people who are willing to give your business this kind of loan.
3. Angel Investors
An angel investor may be an individual or a group. These investors generally invest early using their own money. Like most investors, they want to find companies that have the potential for growth and will result in a good ROI for them. If you, like many people, are wondering where you can find angel investors, then this list of great platforms for finding angel investors for your business will be incredibly useful:
- AngelList is a popular online platform that connects startups with angel investors. In fact, it may be the most popular angel funding platform out there.
- The Angel Investment Network is a global angel investor network. It connects startups with angel investors in over 100 countries. One of the benefits of using the Angel Investment Network is that it gives you access to a wide range of angel investors, both in the United States and internationally.
- The Angel Capital Association is the largest angel investor group in the world. It’s made up of over 250 angel investor groups, which collectively have over $25 billion in assets. One great benefit for local small business owners is that the Angel Capital Association can help you connect with angel investor groups in your area, which can be helpful if you’re looking to raise money from local angel investors.
4. Venture Capitalist (VC)
Venture capital (VC) is generally provided by a Venture Capital firm, which manages finances from many investors and looks for very specific types of companies to invest in.
They invest in high-risk opportunities that have high ROI potential. The investment is considered long-term at upwards of five to eight years because that’s how long it generally takes for a company to become ready to be sold or to go public. This is the outcome most VC firms desire, and it will likely influence the way they steer your business.
The internet has made getting investment funds from non-professional investors much easier with the proliferation of crowdfunding sites that connect entrepreneurs with a wide audience of potential micro investors that can help your business reach your fundraising goals.
Because crowdfunding platforms encourage smaller investments from a larger population, companies typically do not have to give up equity or stakes in their business. In exchange, they will give their investors first access to a product, select input, and other exclusive features. However, there are options for equity crowdfunding.
Some of the best crowdfunding sites are Indiegogo, Kickstarter, GoFundMe, SeedInvest, and Patreon.
6. Business Loans and SBA Guaranteed Loans
Another source of small business financing is to apply for a small business loan, which will typically be a bank loan, where the interest rates are often determined by the amount of risk associated with your venture. While it can be difficult to get a business loan with bad credit, there are certain steps you can take to get a business loan with bad credit.
Moreover, if you have trouble getting a traditional business loan, you should look into SBA-guaranteed loans. When a bank thinks your business is too risky to lend money to, the U.S. Small Business Administration (SBA) can agree to guarantee your loan. That way, the bank has less risk and is more willing to give your business a loan.
Now that you know what your options are for getting funding for your business, you might be wondering what concrete steps you can take to ensure that you get the best investors for your small business venture. Well, the first thing to do is to draw up a stellar business plan, complete with industry analysis, projections, and goals.
You will also want to make sure that you are engaging in fruitful networking opportunities and forming connections with potential investors and mentors. With these steps in place, you can determine the type of investment that would be best suited for your business and pursue the right investor with confidence.If You Like Please Share It: