How to Find Investors for a Small Business: Top Ways for Startups to Get Capital
Starting a small business is an exciting time. But consider that not all startup funds need to come from you, the business owner, or through a regular bank loan. There are ways to take some of the stress out of your finances, either through investors who only make money when the company makes a profit or loans with low interest rates.
Here are our top 5 ways to find investors for your small business:
- Ask family or friends for capital
- Apply for a small business administration loan
- Consider private investors
- Contact businesses or schools in your area of work
- Try crowdfunding platforms to find investors
1. Ask family or friends for capital
This can be the easiest and most cost-effective way to raise money for your startup. Talk to your family and friends about your business needs. Decide if you just want a loan from them, or if you want investment funds. A loan can be the easiest for both parties – you pay it back with interest over time.
Investment means that family or friends have a stake in your company, and share the risks with you. However, with an investment, you can get more money upfront and unlike a loan, you won’t be paying it back in installments. Investors will get money only if your business becomes profitable.
But don’t get too carried away with the way you approach this with family or friends, or assume it’s a done deal because you know these people. Make the right pitch (using your business plan) and tell them when they can expect to get their money back. If they are investors, explain the risks.
There is a downside to family and friends who become investors, as you are mixing business with pleasure. If the business fails, and their money is lost, the relationship can be permanently strained.
2. Apply for a Small Business Administration loan
The Small Business Administration, or SBA, is a United States government agency designed to help small businesses. It was established in 1953.
Although the agency itself does not lend money, it has a lender match tool on its website, which helps businesses find lenders that have already been approved by the administration. The SBA will also guarantee certain loans, which means generous repayment terms and low interest rates.
The SBA also offers grants, the eligibility requirements of which can be found here.
The agency is also helpful in other ways. On its website, it has tools for entrepreneurs to plan, launch, manage and grow their businesses, as well as links to free online courses and local support.
3. Consider private investors
There are two main types of private investors – “Angel Investors” and “Venture Capitalists”. In exchange for their investments, they will usually receive shares in the company (shares that are not publicly traded).
Let’s take a closer look at the differences between these two types of investors.
An angel investor is a high net worth individual who has the money, resources and background to make a company successful. If an angel investor comes on board, it is likely to contribute enough that no other investors are needed. However, angel investors always expect a high return on their investment. And they won’t invest in just anything – the business case has to be airtight.
Angel investors invest their own capital and usually come in when the business is just starting. An angel investment will mean that he owns shares in the company. Both Amazon and Apple got their start by partnering with angel investors.
An angel investor wants to participate and have a voice in the day-to-day development of the business. There are online resources for finding angel investors, such as the Angel Capital Association. The association lists ambassadors by state.
Venture capitalists are needed when a business is expanding and perhaps moving into a risky venture. Venture capitalists do not use their own money, but investors’ money (they set up a fund that is used to buy shares in the company for others).
Although venture capitalists can help startups, they usually come into the business when it is already established, has a solid management team in place, and has already proven successful. That business now plans to change and needs money. In fact, its new product or service might even be a game changer.
The amounts required for venture capitalists are usually much higher than angel investors, they can be in the millions. But the return on investment is also predicted to be very high. Like angel investors, venture capitalists will own shares in the company and have a say in how it runs.
4. Contact businesses or schools in your area of work
Chances are, you already know people in the same line of work as you. Perhaps you can connect with them to see if they have any recommendations on who might be interested in investing in your company.
This research process may take some of your time, as you are unlikely to meet someone willing to invest with just one phone call. In fact, you may need to call a lot of people to network or attend industry events. But, if you keep digging, you may be introduced to that particular person who likes your business plan or product enough to invest in it.
Apart from that, schools that offer certificates, diplomas or degrees in your field are also a potential way to reach potential investors. This is because often the professors who teach the program invite guests to speak on certain topics. Usually, these guests are experts in their field. Perhaps you can see if professors or someone in the department will reach out to these guests on your behalf to set up introductions.
5. Try crowdfunding platforms to find investors
A crowdfunding platform allows an individual or business to raise funds online through a website that specializes in a specific type of funding. Let’s look at some of the different types of crowdfunding platforms:
This is where contributors are asked for a relatively small amount of money, in exchange for some sort of reward from the startup.
Let’s give an example. Dave’s Drones is a startup company seeking funding for its new product, a 4K drone with artificial intelligence technology. Every investor who pledges $600 will get a free drone when the product launches 18 months from now (at a retail value of $900). Those who pledge $750 get the drone, two extra batteries and an extended warranty.
This is a great way to raise money, as the “cost” the business will charge to ship the product upon release to each investor will be much less than $600. All the investors are getting, assuming the business is successful, is a great deal.
Kickstarter and Indiegogo are two examples of reward-based crowdfunding platforms.
This is where the money contributed, usually a small amount, is not expected to be returned. The money generated from donation-based crowdfunding is usually for a project, for example donating money to individuals or families suffering some type of loss, or to a community with educational, medical or emergency needs. Funding for a charity or non-profit through donation-based crowdfunding can also generate much-needed dollars.
For example, the family of a person diagnosed with a disease can start a donation-based crowdfunding campaign to help cover expenses that insurance doesn’t cover. Or a bereaved family can start a fund for funeral services or future education for children.
Peer-to-peer lending (or debt-based crowdfunding)
Peer-to-peer businesses facilitate loans by matching people or businesses in need of money with investors.
Applicants fill out an online form, and the peer-to-peer lending facility provides a credit score to potential investors, who can then decide whether to lend money.
Investors get their money back monthly plus interest. Thus, they do not own any of the businesses they are funding. The simplest analogy here is to a bank loan, except that the borrower is paying less interest than would normally be paid to the bank and the investor is earning a higher return than he would have earned through a regular savings account or other. Bank investment product. However, there are risks involved, as investors’ money is not protected by the government.
Examples of peer-to-peer lending institutions are Lending Club and Prosper.
This is a type of crowdfunding where investors take some ownership in the company, typically through shares. Although their original investment is not paid back, they get a share of the profits if the company does well.
The amount invested is not small, usually starting in thousands. The rewards can be greater than a typical investment, but equity-based crowdfunding is also risky because there are no guarantees on returns. Startups typically don’t pay dividends or interest in the early days, and there are fewer legal protections.