Starting a small business is really exciting, but it can also be very expensive. The funds for your business don’t have to come from your own pocket. Lots of entrepreneurs get help from investors to get their business off the ground. There are a number of ways to get investors on board with your business. The main thing you’ll need is a winning idea and a clear vision as to how you’ll turn that idea into a successful business. In this article, we’ll unpack the different ways you can get funding for your business and the best way to go about seeking investors.
What is a Fair Ask for an Investor?
Before you start seeking investors, you’ll want to put some work into how much your business is worth, and how much you want to raise in investor funding.
First, you’ll need to calculate the value of your company at the time of the funding request. You can start by adding up your assets, or everything the business owns including equipment and inventory. Calculate the revenue of your annual sales, and do a cash flow analysis. Traditionally, when seeking investors, the rule of thumb is to ask for 20-30% of your total value in funding, in exchange for 20-30% of your company.
Factor in, realistically, what you’ll need in funds to support startup costs. Adjust your expectations according to this figure and add a buffer. Round up your funding request and adjust the equity you’d offer to your investors based on this number.
How to Hook Investors and Get Small Business Funding
Once you’ve found some potential investors, the next step is to reel them in and get them to invest in your business. To do this you’ll need to write a business plan. Conduct extensive market research that can help investors understand the risk of their investment and the expected return on investment (ROI). Investors are not charities. Usually, they’ll be looking for something in return for their support, this is why you need to offer them reasonable equity in exchange for their investment. You’ll want to promise them transparency with their investment. They have stakes in the game and therefore have a right to know what’s going on with the business. They will want to know where their money is being spent. NorthOne’s innovative mobile banking has integrative features that can make it easy to give investors insight into what’s happening with the finances of the business.
How to Find Investors
Before you get your investors excited about your business, and convince them to invest, you have to find these investors. Here are some options for seeking funding for your business from investors.
Start with Your Inner Circle
When it comes to finding investors, a good place to start is with your inner circle, particularly if your business is valued under $1 million, which the majority of small businesses are. This is a good place to start because these are relationships you have already spent years establishing. Your friends and family can be a trusted source of financial support. In turn, your inner circle will likely have a better understanding of who you are as a person and can rely on you to hold up your end of the bargain. Even though you will have personal relationships with these investors, it is important that you still conduct yourself professionally. Write up a legally binding contract with the terms of investments. You’ll want to create clear cut boundaries and regulations to protect both your relationship and your business.
Research Small Business Loans
Another option for sourcing funds for your small business is by getting a small business loan. The Small Business Administration (SBA) facilitates thousands of loans to American businesses every year.
The SBA doesn’t provide money itself, but works with lenders to help small businesses secure loans with the SBA as a guarantee. This means less liability for small businesses and low-interest rates on repayments. These loans are available for general startup and operational costs of businesses but are also provided to businesses that have been affected by natural or economic disasters.
Another common choice for funding these days is crowdfunding. Crowdfunding platforms provide business owners with an online channel to raise funds. You can set up a campaign for different projects you need to raise for. There are a few different crowdfunding options.
Rewards based crowdfunding is where people contribute a small amount of money in return for some type of reward. For example, if you need funds to build a prototype of your product, the reward might be that those who contribute will receive one of the first products when they are available. Kickstarter is probably the most popular rewards based crowdfunding platform.
The other option is donation-based crowdfunding. The difference in this case is that when the money is donated, it is not expected back. Donation based crowdfunding is usually for a project that will benefit the greater good. It might be to support a community based or educational project. Sometimes it is to raise money for a family or individual in need. Just Giving is an example of a donation based crowdfunding platform.
Peer-to-peer lending is a relatively new lending option. The goal is to cut out the middleman, allowing businesses and individuals to get funding from their peers without involving a financial institution. There are a number of websites that can connect borrowers to the right investors. The business fills out a form and the website or agency will provide a profile for potential investors. It is then up to investors whether or not they want to invest. This type of funding is similar to a bank loan as the investor receives monthly payments with interest. These investors probably won’t own much equality if any at all.
With equity crowdfunding, investors will receive some ownership of the company they invest in. This form of crowdfunding can be risky as there is no guarantee on return, that being said with big risk comes big reward. Startups also don’t pay out dividends or interest early on in their operations.
Know the Difference Between Legal and Illegal Investment
The last thing you want to do is get involved in illegal activity when you are trying to start a business. It’s important you educate yourself on the difference between legal and illegal investments. Make sure you know the basics of the Securities and Exchange Commission (SEC) requirements. Know the difference between accredited and non-accredited investors. Any company that offers or sells securities must register with the SEC. An accredited investor is any personal or legal entity that is allowed to participate in investment activities not registered with the SEC.
An accredited investor is any person who:
- Has an annual income exceeding $200,000 individually, or $300,000 for joint income
- Has a net worth exceeding $1 million
Non-accredited investors can still invest but on a smaller scale. They can invest in stocks, bonds, mutual funds, and publicly-traded real estate. Most of these investments are available within retirement portfolios.
It’s important that you always make sure you are taking funds from people who are legally allowed to invest in your company.
Search for Angel Investors
The golden ticket for entrepreneurs starting a business is to find an ‘angel investor’. This is a private investor who has a high net worth and can provide a business with significant funding. Angel investors fund startups at the early stage of business operations. This funding will typically be in exchange for significant ownership equity in the company they invest in. Investing in a small business or startup so early in its operations is risky. An angel investor is usually putting their own money on the line. Angel investors are almost always accredited investors.
Here are some of the key benefits of finding an angel investor to fund your startup:
- Angel investors can make investment decisions quickly since they are using their personal money.
- The business owner doesn’t need to put personal assets on the line as collateral in exchange for funding.
- The business owner will gain access to a greater network of investors, contacts, knowledge and resources, brought by their angel investors.
- There’s no repayment plan or interest.
It is important to note that by using an angel investor you will most likely need to give up part ownership of your business. Some entrepreneurs see this as a major disadvantage. It can be incredibly difficult to find an angel investor but if you are lucky enough to find someone who is willing to invest personal finances into your business at its earliest stages this could be a major opportunity for the future of your company.
Leverage Social Media
Social media is a very handy tool for business owners. Take the time to build a digital footprint for your business on your chosen social media channels where you can cultivate a significant following and eventually attract investors. Post about your business regularly. Publish and share articles that show you have knowledge and passion in your chosen industry. Engage with your network by responding to others’ content in a thoughtful and encouraging way. Encourage anyone who has had a positive experience with your product or service to post about it online so it is visible to potential investors.
Lean on Your Social Media Network
Once you have started to establish a digital footprint on social media, use this to get on potential investors’ radar. If you have any mutual contacts, see if you can use these to get an introduction. Engage with potential investors content and if you feel it’s appropriate, reach out to them to begin building a relationship.
There are lots of different ways you can find funding for your business. If one option falls through, don’t give up! Having a successful business is all about resilience. The only way you can succeed is by never letting setbacks, financial or otherwise, stop you from pursuing your goal.