These are the 5 types of investors your small business needs
You know you could make a lot more money if you could only expand your business—stock up on more inventory, get real estate to open new locations, spend more on marketing, and hire more employees. However, all of these things require money.
Being an entrepreneur can feel like a Catch-22 where you need money to make money. That’s where personal investors come in. Finding investors for your small business can seem intimidating, but this guide will examine what you need to know.
Does my small business need more capital?
Before you start sending cold emails to investors, ask yourself why your business needs more capital in the first place. Spend plenty of time brainstorming to develop a business plan, including business cash-flow projections and how you plan to use the new money.
You should be able to spell out precisely how the investment will help grow your business, how much money it will take to reach your goals, and how you intend to repay your small business investors.
By mapping out the entire process, you will know what you need from investors to succeed in seeking capital. It’ll give you a more robust and more convincing sales pitch than simply asking for a lump sum of cash without well-defined plans.
Debt vs. equity investing
Whether you’re starting a new business or growing an existing one, your next step is to determine whether debt financing or equity financing is a better funding option for your business.
Debt financing is when you take out a loan (or similar style of debt) to pay for your business’s expenditures.
You will receive a lump sum of cash and pay it back according to the repayment terms. In this sense, debt financing is no different from taking out a mortgage or using a credit card.
Equity financing is a style of raising money in your company by selling partial ownership of your company. Your investors—family, friends, venture capitalists, or other types—give you a lump sum of cash in exchange for a percentage of your business. You are essentially swapping ownership of your business for money.
With an equity investment, your investor will most likely take an active role in helping to manage your business. They are a part-owner now and have a vested interest in making sure that the business succeeds.
Types of private investors
Small business owners have quite a few options when it comes to raising money for their businesses.
If you are worried or nervous about asking for private equity, remember that many people devote their lives to making private investments in small businesses. It’s incredibly common for a small business to receive a loan or investment from a personal investor.
Here are some of the best places to get started:
- Friends and family: Many companies got started with money from friends and family. Even Jeff Bezos started Amazon by hitting up his folks. Consider putting out a public post on LinkedIn or other social channels. You might be surprised who sees it and reaches out.
- Venture capital: Venture capital firms invest in small businesses in exchange for equity in the company.
- Angel investment: An angel investor is a high-net-worth individual who invests their own money in startups and other companies. The Angel Capital Association dedicates itself to supporting the success of angel investors looking for a high return.
- Small Business Investment Company: This is a privately owned company licensed and regulated by the U.S. Small Business Administration (SBA). SBICs can be both debt and equity investors.
- Crowdfunding: This is a newer style of raising money that bypasses a single investor. Crowdfunding raises investment funds by collecting small amounts from many different investors. For example, 100 investors might all send you $5,000 to raise $500,000. Kickstarter and Indiegogo are two of the most popular crowdfunding platforms.
Small business bank loans are probably the most common way to raise money. You approach your bank for business financing and then repay the funds according to the lender’s specifications.
Pros and cons of working with a personal investor for a small business
Bringing on a private investor is a significant business decision. Let’s take a look at a few of the pros and cons of the options.
Pros of working with private investors
You need money to grow your business. A private investor can give you that money.
If you are working with a venture capitalist, you could potentially also benefit from their ownership stake. For example, let’s say that your venture capitalist has lots of experience managing businesses. They can oversee your expansion efforts and point you in the right direction along the way.
Additionally, accepting any form of financing will bring a new level of accountability to your small business. For example, if you fail to repay a small business loan, you could face serious consequences.
However, this added pressure can be considered a good thing—owing someone money can provide more incentive to find success.
Cons of working with private investors
Even though personal investors can help you grow your business, you’ll want to consider the potential downsides.
When you accept debt or equity financing, you are giving up control of part of your business. Even if it’s debt financing (where the lender has no ownership stake), they will still have a claim to your business if you fail to repay the loan.
You want to make sure you’re working with the right investor—if you accept equity financing, your investor will have an ownership stake. This gives them a say in the direction of the company. It could present a potential issue if you’re the type of small business owner who likes to do things a certain way.
What are investors looking for in small businesses?
When you approach an investor, you need to sell them on why they should invest in your business. Successful venture capitalists can get dozens of investment requests every day. Traditional lenders such as banks are also notorious for scrutinizing every aspect of your business before approving a loan.
You need to start on the right foot with a strong proposal. Besides having a well-thought-out business plan, one of the best ways to show your potential investors you’re serious about your company’s future is to have small business insurance.
Private investors can rest easy knowing that insurance coverage protects your business (and their money) against liability claims and general mishaps.
Get affordable small business insurance tailor-made to you
Investors are taking a risk by investing in your small business. A small business insurance policy from Huckleberry can protect against some of the risks. The right combination of general liability coverage, business interruption insurance, and coverage for your business assets can provide peace of mind to personal investors.
There are no hoops to jump through. Huckleberry makes it easy—everything is online, and your quote can be ready in less than 5 minutes. So, skip the insurance agent and get small business insurance through our easy-to-use online portal.