Starting a small business is an exciting time. But consider that the startup funds don’t all have to come from you, the business owner, or through a regular bank loan. There are ways to take some of the strain off your finances, either through investors who only earn money when the company makes a profit, or loans with lower interest rates.
Here are our top 5 ways to find investors for your small business:
- Ask Family or Friends for Capital
- Apply for a Small Business Administration Loan
- Consider Private Investors
- Contact Businesses or Schools in Your Field of Work
- Try Crowdfunding Platforms to Find Investors
1. Ask Family or Friends for Capital
This may be the easiest and most cost-effective way of raising money for your startup. Talk to your family and friends about your business’s needs. Decide if you just want a loan from them, or if you want investment funds. A loan may be easiest for both parties – you just pay it back over time, with interest.
An investment means family or friends would hold a stake in your company, and share the risks with you. However, with an investment, you might be able to get more money upfront, and unlike a loan, you will not be paying it back in installments. Investors will get money only if your business becomes profitable.
But don’t be too casual about the way you approach this with family or friends, or assume that it’s a done deal just because you know these people. Do a proper pitch (using your business plan) and let them know when they can expect to make their money back. If they’re investors, explain the risks.
There is a downside to family and friends who become investors, as you are mixing business with pleasure. If the business fails, and their money is lost, the relationship may be strained, forever.
2. Apply for a Small Business Administration Loan
The Small Business Administration, or SBA, is a United States government agency designed to help small businesses. It was established in 1953.
Although the agency does not lend money out itself, it has a lender match tool on its website, to help businesses find lenders that the administration has already approved. The SBA will also guarantee certain loans, meaning generous repayment terms and lower interest rates.
The SBA also offers grants, the eligibility requirements of which, can be found here.
The agency is also helpful in other ways. On its website, it has tools for entrepreneurs to plan, launch, manage and grow their businesses, as well as free online courses, and links to local assistance.
3. Consider Private Investors
There are two main types of private investors – “Angel Investors” and “Venture Capitalists”. In return for their investments, they will typically receive shares in the company (shares that are not publicly traded).
Let’s take a closer look at the difference between these two types of investors.
An angel investor is a high net worth individual who has the money, resources and background to make a company successful. If an angel investor comes on board, he is likely to contribute enough so that no other investors are needed. However, angel investors always expect a high return on their investment. And they won’t invest in just anything – the business case has to be airtight.
Angel investors invest their own capital, and typically come in when the business is just beginning. An angel’s investment will mean he own shares in the company. Amazon and Apple both got their start by aligning with angel investors.
An angel investor is likely to want to participate and have a voice in the day to day development of a business. There are online resources to find angel investors, such as the Angel Capital Association. The association lists angels by state.
Venture capitalists are needed when a business is expanding and perhaps heading into a riskier venture. Venture capitalists do not use their own money, but that of investors (they set up a fund that is used for others to buy shares in the company).
Although venture capitalists can help a startup, typically they come into a business once it’s already been established, has a solid management team in place, and has already proven to be successful. That business now has a plan for change, and needs money. In fact, its new product or service might even be a game changer.
The amounts required of venture capitalists are typically much higher than that of angel investors, it can be in the millions. But the return on investment will also be predicted to be very high. Like angel investors, venture capitalists will own shares in the company and have a say in how its run.
4. Contact Businesses or Schools in Your Field of Work
Chances are, you already know people in a similar line of work as yours. Perhaps you can connect with them to see if they have any recommendations on who may be interested in investing in your company.
This research process might take up quite a bit of your time, as you’re unlikely to find someone willing to invest, from just one phone call. In fact, you may have to call a lot of people or even attend industry events to network. But, if you keep digging, you just might be introduced to that certain someone who likes your business plan or product enough to invest in it.
Barring that, schools that offer certificates, diplomas or degrees in your field are also a possible way to reach potential investors. This is because often the professors who teach the programs invite guests in to speak on certain subjects. Typically, these guests are experts in their field. Perhaps you can see if the professors or someone in the department will reach out to these guests on your behalf, to set up an introduction.
5. Try Crowdfunding Platforms to Find Investors
A crowdfunding platform allows an individual or business to obtain funds online, through a website that specializes in the particular type of funding needed. Let’s look at some of the different types of crowdfunding platforms:
This is where contributors are asked for relatively small amounts of money, in return for some type of reward from the startup.
Let’s give an example. Dave’s Drones is a startup company looking for funds for his new product, a 4K drone with artificial intelligence technology. Each investor who pledges $600 will get a free drone when the product launches 18 months from now (at a retail value of $900). Those who pledge $750, get the drone, two extra batteries, and an extended warranty.
This is a great way to raise money, because the business’s “at cost” charge to send each investor the product upon release will likely be a lot less than $600. All the investor is getting, assuming the business is successful, is a great deal.
Kickstarter and Indiegogo are two examples of reward-based crowdfunding platforms.
This is where the money contributed, usually small amounts, is not expected back. The money generated from donation-based crowdfunding is usually for a project, for instance to donate money to individuals or families suffering from some kind of loss, or for a community that has educational, medical or emergency needs. Money for a charity, or non-profit, can also generate much needed dollars through donation-based crowdfunding.
For example, the family of a person diagnosed with a disease may start a donation-based crowdfunding campaign to help cover costs that insurance won’t cover. Or a family that loses a mother or father might start a fund for funeral services or future education for the children.
GoFundMe is an example of a donation-based crowdfunding company.
Peer-to-Peer Lending (or Debt-Based Crowdfunding)
Peer-to-peer businesses facilitate loans by matching people or businesses needing money, with investors.
Applicants fill out an online form, and the peer-to-peer lending facility provides a credit score to potential investors, who can then decide whether to lend money or not.
The investors receive their money back monthly, plus interest. In this way, they do not own any of the businesses they are providing funds to. The easiest analogy here is to that of a bank loan, except that the borrower is paying less interest than would be typically paid back to a bank, and an investor is earning a higher return than he would have received through a regular savings account or other bank investment product. There are risks though, as the investor’s money is not protected by the government.
Examples of peer-to-peer lending organizations are Lending Club and Prosper.
This is a type of crowdfunding where investors take some ownership in the company, typically through shares. Although their original investment is not paid back, they will receive a share of the profits if the company does well.
The amounts invested are not small, typically they starts in the thousands. The rewards can also be much greater than a typical investment, but equity-based crowdfunding is also riskier because there is no guarantee on return. Startups typically don’t pay out dividends or interest in the early days, and there are fewer legal protections.
An example of an equity based crowdfunding platform is OurCrowd.