Are you starting a business, or do you already have a business, but need more money to expand it? If you want to start a business, or already have a business and want to make improvements, there are different types of investors you can look at for your business – they include banks, angel investors, peer to peer lenders, venture capitalists and personal investors. This article will discuss these five different types of investors.
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Banks – If you’re just starting a business, you may be able to get a bank loan. When you apply for a bank loan, it’s best to use a bank you already do business with. You’ll need to be able to prove you’re financially responsible and wait for the loan to be processed. In the US, you’ll want to apply for a loan that’s funded by the Small Business Administration, because they set guidelines for their partners, and guarantee that the loans will be repaid. This helps the lender decide whether or not they want to loan you money. There are three different types of loan programs that banks offer to business, they are:
- 7(a) loan programs – You need to meet certain requirements tobe considered for a 7(a) loan program. You need to own a business that’s affected by NAFTA, to meet certain pollution control requirements, and your lender needs to be based in a small community or out in the country.
- Microloan program – If you own a small business in the US, it may qualify for a microloan that’s funded by the SBA. Microloans can be made for as much as $50,000 – the average amount for a microloan is about $13,000. They can be used to provide money for the day-to-day operations of the business, to purchase inventory, furniture or fixtures for the business, as well as machinery or equipment. They can’t be used to pay debts the business may have currently or buy real estate.
- 504 loan program – These loans are administered by the Certified Development Companies. They allow businesses expand or modernize their business. They provide money for purchasing buildings or land and making improvements, building new facilities bringing current facilities up to date, buying machinery that will be used for a long time, or refinancing debt so businesses can expand through new or renovated facilities or equipment. They are usually structured so that the SBA provides 40 percent of the project cost, a participating lender provides up to 50 percent of the cost, and the applicant covers the last 10 percent.
Before you apply for a bank loan, you’ll want to make up a detailed business plan, and have a thorough description of your business and its prospects. You should also write up a business proposal, which provides information on the products or services you offer, as well as your financial and management projections, and a plan for how you want to implement your goals.
Angel investors – Angel investors could be professionals like doctors or lawyers, people you’ve done business with, or experienced entrepreneurs who want to help out new entrepreneurs. Angel investors need to have a net worth of at least a million dollars and make at least $200,000 a year, or $300,000 a year if their spouse is also going to be an angel investor. They also need to want to invest hundreds of thousands of dollars into your business. All you have to do is give them a share of the profits.
They are a good choice for people who are past the start-up phase of their business, but still need money to develop a product or a marketing strategy. Angel investors can also provide valuable advice and insight to business owners, as well as the money they need to grow their business. If you’re interested in angel investing, you can find angel investors through angel groups, or by networking at events sponsored by your local Chamber of Commerce.
Peer to peer lending – With peer to peer lending, you list projects that people could consider investing in. This type of investment is different from an angel investment because there are no net worth requirements, and instead of looking for a group of people, you’re listing your project online for potential investors tolook at. The Small Business Administration recommends you take the following steps when listing a project on a peer to peer lending site:
- Make a plan that includes information you find when doing market research, analyzing your competition, and figuring out how much you expect to make
- Tell the potential lenders about your goals for your business, and what you’re experienced in
- Tell what you’ve achieved with your business – potential lenders will want to know how much you have invested yourself, and what stage your business is at. You’ll also need to show potential lenders that your business is destined to be successful
- Make sure you have good credit – When you apply for a peer to peer loan, you’re giving the potential lenders permission to look at your credit score, and you may have to improve your credit history before you can apply for a loan
- Also, make sure you understand the terms of your loan and make your payments on time – if you fall behind your fees will go up, and that may make you ineligible for another peer-to-peer loan
- You’ll also want to check in your state to see if there are any specific regulations regarding peer to peer lending
Venture capitalists – Once you’ve advanced your business a little more, you may want to consider having a venture capitalist invest in it. Venture capitalists will ask for a share of your company – they are betting that its value will go up over time, and will want to get a return on their investment. They will also invest millions of dollars, if needed, to help your business expand. They may want a bigger return on their investment than what the interest rate may be on a business loan. One possible venture capitalist you may want to consider is TejKohli – you can find his website, Kohli Ventures, at http://kohliventures.com/
Personal investors – Personal investors are people like friends and family. If they have the cash to help your business expand, they may be willing to lend it to you. Mixing business with family can be risky however, especially if your business doesn’t do as well as you expected it to. If you discuss business problems at family gatherings, you may hurt not only your finances, but also those of the friend or relative who lent you the money, and you may even hurt your relationship with them. Before you choose to go this route, make sure you have a strong relationship with the family member. You and the family member may want to sign an agreement that spells out the repayment terms, or sign a partnership agreement if you and a friend or family member are starting a business together.
These are the five major types of investors for your business – each can provide the money you need to get your business going, and then continue to expand. Before you decide to use any of these investors though, be sure to research them thoroughly to make sure they can help you get your business to the next level.