Investors in your business - are they the best solution for your funding problems?
When looking for investors in a new business – I usually suggest that you go first seek out any grants or government assistance that your state, county or country offer – as this money is often subsidized and easier to obtain for a new business.
Your next stop would be the bank. They will be seeking to lend you money that is secured on some kind of collateral. A business loan is more usually for 2 – 5 years. A bank will not generally want to get involved with your business – just some confirmation that they will get their money back with interest.
The next port of call is an investor. Now these people are totally different to banks – in that that are actually investing in you and your business and they often want to get involved with your business as well. So let’s analyze this a little more.
What are investors looking for?
* In your business: They want a sound business or business idea with some kind of unique concept that they believe will rapidly move to profitability. They want a well thought out and credible business plan with realistic financials.
* In you: They want a hard working entrepreneur with good experience in the business area. They will look at your personality, your abilities and your past resume to see if your are the kind of person that can make a success of this type of business. Similarly they will want to feel that they can work with you – because they will be.
* From the loan: Investors will only want to invest in your business for a few years, often a low as one year. They expect to be able to obtain a good rate of return on what they see as a risky investment. They will also often require a share of your business as their security. If you are seeking a large loan – they will often request a seat on the board of your company so that they can exercise some kind of control on the business activities.
What they will bring to your company:
* Experience and Guidance: Investors often invest in areas that they know a lot about. They are obviously keen for your business to be a success as their return on their investment is dependant upon this factor. This means that they will often offer guidance and help to you as part of the package.
* Cash Injection and Cash Flow: Some times you can request a staged investment from an investor, subject to you reaching agreed deadlines. This not only concentrates the mind in your business development, but also ensures that money is available when you need it. Suffice it to say that cash is always welcome in a business.
Your business plan is very important. You need to prove that you meet all the requirements above, but you also have to include what is called an Exit Strategy. This basically answers and lays out in detail, the four questions that every investor will ask:
* What’s in it for me?
* How soon do I get my money back?
* How risky is it?
* How much will I make from this investment?
One last suggestion for you – if you do not have the experience of every part of your new business, I would consider bringing such a person onto your team. Good luck with your new business.
Have a question for Lee or want to leave a comment?