Starting a small business is exciting! Growing an idea into an actual product or service and then building out a scalable company that's successful is an entrepreneur's dream. However, sometimes, this growth needs capital to help it get to where it needs to go which you might not have.
You could go after a bank loan, but what if you can’t get a loan? You could look at finding investors? But how do you find the right investors? Business investors are a different source of income than banks and can add a dynamic to your business that a bank never could. But which source of capital is right for you?
This article will give you advice on finding the right kind of investor for you and your business, and teach you the basics of organising the money and finances for your small business.
Different types of investors you’ll come across
As you would know, there isn't just one type of investor out there. Each kind of investor has their advantages and disadvantages. Different investors want different things from you and your business.
Let's dive into each and see what the pros and cons to each are, which will hopefully, help you make the right decisions for your small business.
Angel investors specialise in start-ups, entrepreneurs, and small businesses looking to make a leap into a bigger business.
Angel investors often have better terms and conditions than other kinds of investors because they’re helping you out. They want to see you succeed.
While we do call these generous people angel investors, not just anyone can be one. They still must meet SEC standards and have a minimum net worth of about $1 million.
- Flexibility - Because they use their own money to invest, the negotiations can be different. They know the risks they’re taking.
- No interstate repayments - Unlike banks, and other lending institutions, an angel investor lends you money and gets a small stake in the company instead of interest repayments.
- There are a lot of them - you would be surprised how many business angels are out there ready to help small businesses start and thrive.
- Loss of control - be careful how much of your business you give to an angel investor. Too much, and you may lose control of your dream.
- Higher expectations - as this is a person lending you money, rather than an institution, they may want more from you, and you may feel obliged to over-achieve for them and to prove yourself.
A Venture Capitalist (VC) provides capital for companies that want to expand but don’t have access to the cash they need.
VCs expect a high return on their investment, which is why they agree to help. They will research you thoroughly to this end.
- Access to large amounts of capital.
- Experienced leadership and advice can be gained.
- Networking and industry collaboration opportunities are possible.
- You need to give up some stakes in your business.
- Difficult to find and land a VC.
- A more formal structure for your business, including a Board of Directors, will be required.
While not technically a kind of investor, borrowing money from a bank, when approved, can still have some of the ramifications as if you had used a type of investor.
Bank loans are more straightforward than some types of investment. You make regular repayments and won't have a need to give up any stake in your business.
If you’re eligible, and have the time to apply, sometimes a bank loan is the simplest option.
- A bank loan is temporary - once you’ve paid it back, you don’t have someone as a part of your business who you might not actually want.
- The interest on a bank loan is tax-deductible - get your accountant onto that.
- You maintain 100% control of your business.
- It can be tough to qualify for a loan.
- Interest rates can be high.
Friends & family (personal investors)
It can be easier to convince a loved one, or family member, to lend you money, rather than try to find an investor.
Beware not to burn your friends and family if you go down this path. Relationships can be hard to mend than bad debts.
Make sure you have solid paperwork ready. It helps to have some legal definitions, terms, and conditions. It could give your friends and family the security they need to lend you the money.
- Easier to apply and find investors.
- You don’t go into debt with a bank.
- You can share the wealth with people you care about.
- A panel of critics is just a phone call or a family gathering away.
- You may burn relationships you invested years in building.
- If you fail, your friends and family fail with you.
This is asking the public to give you money to build your business. You give them promises of rewards, such as discounts on products or services, or even a percentage of ownership in your company.
- A niche audience that gives you money is already your core customer group.
- Can easily raise more than the initial investment request.
- Great way to market your business.
- Not a guaranteed source of investment.
- Fees to the platform can be hefty.
- You are required to service the investors first, with rewards, before hitting full production.
- Reputation. If you get investment and don’t produce, this will be bad Public Relations (PR) for you.
This is where you start your business with your own finances. You use your savings, credit cards, and money from your parents. You get the idea. It can be liberating and highly stressful at the same time.
- Your money, your rules No one has a slice of your business pie. Just you.
- You know how much money you have to spend, so you can’t spend any more.
- It can teach you how to be successful through lean times, to better use the funds you have.
- If you run out of money, your business is solely dependent on you, which can lead to a load of stress.
- You'll likely need to reinvest most of your profits back into the business, meaning you might be taking little or no money as a wage for the beginning of your business.
- If you’re almost there, and you just need a bit more money, that could be a roadblock.
How to get people to invest in your company
Finding someone to invest in your business is one thing, but they will need a reason WHY they should invest. Here are some tips on convincing your investors to invest and how you can execute the sales pitch.
Write a business plan
It’s important to have a plan. It is highly unlikely someone will invest big capital with you if you don’t have a plan.
Show potential investors where you’re heading and how awesome it would be if they came along for the journey.
Make sure your pitch is on point
Know your stuff. Practice your pitch, and show the investors the benefits to them if they choose to invest. List the features and why it is a good idea.
Practice an elevator pitch - the 30-40 second chance you get to show why your business is incredible.
Get in a room with potential investors
This follows from the above mention of an elevator pitch. If you can get in a room with potential investors, and give them the skinny on your business and why they should invest, you can catch some big fish quickly.
Where are these magical rooms? Business events, industry conventions, local council business groups. Once you start looking, you’ll discover there are a few around.
Hire a business coach
The Entourage has a swathe of highly skilled business coaches ready to help you, in any city in Australia. Finding investors for your business is just one thing they can help you with. The advantage of using one of our business coaches to help you is they know that their advice is vetted.
They have their own contacts, plus they can rely on the network of business coaches, industry experts and advisors that The Entourage has connected throughout Australia.
Need more help?
Want to know more? You can get trained yourself in accelerating your business and elevating it above and beyond. This training can help you approach certain types of investors, and what to say to them.
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