Starting a business allows you to take greater control over your professional life and become your own boss. However, it requires a significant investment in terms of time, effort, and money. Even if you have a nest egg stashed away, you don't want to necessarily spend all of your carefully saved cash on your startup.
Outside investors can provide the funds you need to establish and grow your business. This will alleviate financial strain in the early stages of your enterprise and further improve your odds of success in the long run. This article outlines the various types of investors you might consider approaching to secure funding for your entrepreneurial endeavor.
How Investors Can Help Small Businesses
With sufficient capital from investors, you can cover the costs of business licenses, machinery, equipment, labor, and other expenses associated with entrepreneurship. Depending on the type of business you plan to open, you may also need to pay for costs like commercial real estate leasing and utility costs (electricity, gas, etc.).
In addition to basic startup costs, you'll need to invest in promoting, advertising, and marketing your new business. This might involve hiring external consultants like web designers, search engine optimization (SEO) experts, social media managers, street teams, pay-per-click (PPC) ad professionals, and more. As your business expands, you'll further want to invest in tools and processes to streamline operations.
The right investors can provide the liquidity you need to cover such diverse costs. Many entrepreneurs prefer to turn to investors instead of traditional bank loans because of the greater flexibility they offer for terms and interest rates. Plus, there's a variety of investment opportunities available, giving entrepreneurs diverse options.
Ways to Find Small Business Investors
Before you start approaching potential investors, it's important to have a well-structured business idea. A business plan can help you get organized. The U.S. Small Business Administration (SBA) provides tips and templates to help you draft this document, which serves as an operational guidebook for your startup. It covers everything from a product and service description to a market competition analysis.
With a comprehensive business plan in hand, you'll have an easier time explaining to investors what your business is all about and why you're sure it's destined to be a success. Whether you're approaching equity crowdfunding sites, accelerator programs, or an angel investment network for funding, they will do their due diligence to ensure they aren't throwing their money away on a lost cause.
Once your business plan is ready to go, you can start approaching investors. Here are some popular options.
Small Business Administration (SBA) Loans Explained
The SBA is a government agency designed to promote the success of small businesses across the country. Although the agency doesn't dole out money, it works with reputable lenders to match business owners with the resources they need. Check out the lender match database of SBA-backed funding options. The SBA also offers unique grants for select business owners, like veterans.
SBA is also noteworthy for the diversity of business loans available. You can get anywhere from $500 to $5.5 million to fund a business via SBA programs. Of course, there are some qualifying requirements. For example, you must be a for-profit organization doing business within the U.S. You must also show that you've invested equity (your own money and/or time) into the business.
Gather Capital Through Family and Friends
Your family and friends undoubtedly want to see you succeed in your business venture. They may even be willing to support your dreams financially. Before you start approaching external angel investors, look to your immediate network. This is a smart way to get started, especially if you want to keep interest rates to a minimum - since your loved ones will usually offer a generous rate.
That said, it's critical to establish clear expectations when it comes to financial transactions with close personal connections. You should establish how much the person will loan you, what repayment plan they expect, and how much interest this includes. For example, a friend might loan you $10,000 and expect that money paid back within five years, plus interest of a set percentage.
Further, clearly communicate what role investors will play in your business. If someone gives you money to get started, will they own a stake in your business? How much will they own? Will that stake give them any voting rights? Set these details out in legally binding paperwork. This is the best way to ensure clarity and avoid conflicts in the future.
Private Investors for Small Business
If your network of friends and family doesn't have the liquidity to fully fund your business endeavor (or you simply don't feel comfortable asking them), you can do your fundraising externally. Angel investors and venture capitalists (VCs) are private investors who put up their own money for small businesses, usually in exchange for a share that will (assuming you make a profit) reward them financially.
The digital age has made it easier than ever to find angel investors and venture capitalists. In the past, you would have had to apply directly to venture capital firms to access these high net worth individuals. Now, many accessible websites exist to connect entrepreneurs with private investors, including AngelList and SeedInvest.
Some investors may offer guidance for your business, as well. This is in their interests: If they put their money into your company, they want to see it succeed. This means raising capital can thus be very useful if you want some professional expertise in addition to money. Many angel investors specialize in niche business areas (e.g., health, tech, education), and connecting with a suitable pro can be useful.
Crowdfunding is another form of online fundraising you can turn to. In this case, you're getting cash from the generalized public, not specialized investors. You can likewise use online platforms to connect with people who want to participate in crowdfunding. Popular crowdfunding platforms include Indiegogo and Kickstarter. Entrepreneur offers a list of additional platforms you may want to check out.
How is crowdfunding different from relying on private investors? Following this model, people invest in your company with the promise of getting a deliverable. They don't get a share, ownership rights, or future profits as they would with private investing. For example, if your business plan is to produce a new type of iPhone case, each crowdfund contributor might get a free case when manufacturing is complete.
All you have to do to start a crowdfunding campaign is to join one of the platforms described above. You'll be asked to describe your business product or service and clarify what your supporters can expect in exchange for an investment. This is a great option if your business model involves creating a product with mass appeal.
Gather Investment From Businesses and Schools
Finally, you can look into investment opportunities through business and schools via incubators or accelerators. These are special organizations designed to nurture startups and help them grow and realize their vision. They are generally funded by universities, government agencies, and even private institutions and businesses, including investment firms.
If your startup business is in its early stages, an incubator is likely the best option for you. This will provide you with resources and knowledge and help you find seed funding. If you're further along in your startup planning, an accelerator might be the right fit. In this case, the aim is to speed growth. Often, the same organization will offer incubator and accelerator services. Y Combinator is one example.
Easily Manage Your Small Business Finances With Skynova
What type of funding is best for you? It depends. The above list highlights some options along with pros and cons. For example, crowdfunding is great if you're producing something with mass appeal. Meanwhile, an angel investor can be a fantastic choice if you feel your business would benefit from the guidance of a more seasoned professional.
Once you've secured your startup capital, you want to make the most of it. Keeping an up-to-date record of your business finances will help you avoid wasted dollars. Skynova's accounting software provides a user-friendly platform where you can issue and track invoices, estimates, expense notes, and more.
By minimizing the administrative burden related to money management, you'll have more time to focus on growing your thriving business. Find out how Skynova can support your success as a small business owner.
Notice to the Reader
The content within this article is meant to serve as general information about the types of investors that entrepreneurs may consider when raising funds for a small business. This article is not intended to provide financial advice. Consult a qualified professional accountant to ensure your startup funding and money management are in line with legal requirements and according to best practices.