THERE ARE MANY different methods of obtaining financing for your business. You can select to acquire financing from a venture capitalist group, angel investors, the bank, or even a close family member or friends. You have to find out the eligibility requirements of each of the four groups so you can determine which form of financing is best suited for your company.
The primary similarity between venture capitalist groups, angel investors, and bank financing is that the three parties can go a long way in helping a business get started and increase momentum without the risk of putting personal relationships in jeopardy. Below are the other similarities and differences.
Venture capitalist groups are organizations that will normally invest capital in an already operating business as they prefer to alleviate risk by investing in companies that are already financially stable. They typically offer short-term investments for up to five years. Unlike other investors, venture capitalists only expect returns on their investments and have little or no interest in co-owning the business. When considering the three options of financing and which is best for you and your company, you should rule-out venture capitalists if you are just starting out or are still in the conceptual stages. This is simply because, more often than not, they won’t invest in new un-established businesses. They will expect you to have a business plan put together; also, be prepared to hand over financials, including a report on how you managed your finances over the past 3-5 years. They will also have someone employed in their company to analyze and evaluate everything that your company has done and will do in the foreseen future, just to make sure that they have a firm grasp on, and understanding of, their investment and are aware of all that is taking place on a day-to-day basis.
If you are just starting a new business and trying to acquire financing, you have an elevated chance of getting the amount you desire from an angel investor
. An angel investor (also known as a “business angel” or “informal investor”) is an individual who provides capital for a business start-up
, usually in exchange for convertible debt
or ownership equity
. A small, but increasing, number of angel investors organize themselves into angel groups or angel networks to share research and pool their investing. These investors normally invest in new businesses that look promising. They can be individuals or organizations. They may ask for their returns or alternatively ask to be co-owners of the business. Angel investors make long-term investments unlike the venture capitalist groups. The investment amount may range from hundreds to thousands, or even millions of dollars, depending on the kind of investor(s) that you approach.
You can also acquire bank financing for your business. If you have an established business that has been in operation for an extended period of time, this is another good option. The bank will consider your financial statements and credit history in order to get you a loan. Sometimes, they may elect to give you a smaller loan than you had first requested, depending on your financial status and the bank policies. When you are applying for a bank loan, some of the things that you should take into consideration include interest rates and re-payment periods. Always remember to read the fine print. Different banks have different interest rates, so make sure you do your due diligence and research the best rates and can pay back the amount in a short period of time.
Be cognizant that banks may not offer loans to businesses that are just starting out. This is because they consider these loans to be high-risk, with the probability of having difficulties when it comes time to pay the loan back. After all, trends indicate that business don't usually make money for the first three-to-five years of operation. However, if you provide collateral for the loan, the bank may re-consider. Some of the collateral that you can provide can include business assets, title deeds, car logbooks, and any other assets that they may be able to use as collateral against your loan. Keep in mind, that if you fail to repay the loan, you will lose whatever you provided as collateral.
If you feel that you are able to work with your friends and family, and you have friends and family members with the resources to finance your business, you should consider them as a method of financing your business. Working with family can be rewarding and challenging at the same time; it’s sometimes hard to mix business with your personal life, but if you can persuade your family to advance you a loan at a better rate than the banks, then you are saving the accumulated interest that you would have acquired by using an alternative form of loan (you never know, they might not charge you any interest at all). If they do choose to charge you interest, use financing agreements as you would with any other investor, and outline the payment terms and interest rate your family has agreed to.
Also, make sure you both understand all terms of the contract so there won’t be a discrepancy and cause tension within the family or friendship. If you run into financial problems with your company, your chances are much higher to being able to re-negotiate the terms of your loan to save your business with family members than with a bank or VC group.
When deciding between a venture capitalist group, angel investors, or bank financing and considering which option is the best for you and your company, it is highly recommended that you research all of your options. Go through all of the eligibility and terms requirements and weigh-out the pros and cons for all of your potential investors and see what the best option for your business is.