As your business grows, you need more capital. But, it can be a hassle for small business owners to get funding from large financial institutions. For some small business owners, working with private investors might be a smart move. You need to know how to find private investors for your small business.
Why small businesses are looking for private investors
Securing small business funds from large banks is usually difficult. Even if you walk into the bank with a detailed plan, you are likely to leave empty-handed because small businesses pose a risk to the bank.
Small businesses make less revenue than large corporations and are more likely to default on a loan. The Biz2Credit Small Business Lending Index reported that only 14.9% of small business funding requests were approved by big banks in September 2022.
If you are denied a loan from the bank, don’t worry. There are alternative small business funding options, including private investors. Private financing comes from non-bank individuals (e.g., an angel investor) and firms.
Benefits of using a private investor
Private investors offer several benefits over other small business funding strategies. Often, private lenders specialize in a particular area of business. Beyond funding, they can give you their expertise and guidance.
Private investors are known to take on riskier ventures. They understand the opportunities and hazards of investing in your small business. Having a passion for the industry motivates the right investor to help grow your small business.
Types of private investors for small business
There are many types of private investors to consider. Carefully review your options before choosing a small business investor. Each investor has different strengths, terms, and advantages. The following are some common types of private investors and investment options.
Private equity
Private equity is money invested by private individuals and firms. In return for the funds, private equity investors receive owner’s equity in a business. The goal of a private equity investor is to sell their stake in the business after a few years of investing to make a profit.
Venture capital
Venture capital is available to high-growth startups. Usually, venture capitalists face a higher risk in their investments. But, the investment often has the potential to make a high return. Venture capital is a longer investment than a traditional bank loan. Investors in venture capital actively monitor the business. They are involved in board decisions, marketing strategies, and the business structure.
Angel investing
Angel investing is another private startup financing option. Angel investors are usually high-net-worth individuals who want large returns on their investments. Angel investors are like venture capitalists, except they invest smaller amounts. Angel investors take part in your business decisions and operations.
Federal government programs
Federal government programs offer venture capital programs for small businesses. For example, the Small Business Investment Company (SBIC) Program is offered through the SBA. This program involves privately owned investment funds that are regulated by the SBA. SBIC investors use their own capital plus funds borrowed with an SBA guarantee. The SBA does not directly invest in your business.
Crowdfunding websites
Crowdfunding websites give you access to a wide variety of small business investors. This investment strategy uses collective efforts to fund a business. Each crowdfunding site is different. Find one that matches your business goals and strategies.
Friends and family
Friends and family can be an option for a private investment. Though you know the investors personally, be professional when it comes to money. Make sure your friends and family understand the risks involved before they invest. And, keep them in the loop with business ideas, plans, and forecasts.
Private investor loans
Private investor loans are lending options offered by non-bank entities. Usually, the lender grants the loan because they believe your business has the potential to grow. The individuals and firms listed above sometimes provide private investor loans, including friends and family, venture capitalists, and angel investors. With a loan, you have to pay the money back plus interest.
How to find private investors
The key to finding a good private investor is careful preparation. Make sure you are ready to take on extra small business capital before approaching investors. The investors want to see that you have an organized plan, the potential for growth, and healthy finances.
Create a business plan that maps out what you will do with the money. Include realistic sales projections and detailed strategies that reflect long-term growth. Conduct a market analysis to improve offerings and connect with customers.
Decide how much money you need and compile the plan into a presentation. Know the strategy inside and out so you can easily talk with investors. Practice your pitch so you can convince investors to help finance your business.
After you have a fine-tuned business plan, look for private investors. Start small, working through your professional and personal networks. Try your chamber of commerce, small business community groups, and local trade associations.
You can also seek private investors through business capital brokers. Brokers evaluate your business plan, form relationships with investors, and match you to the best fits. Be cautious of the broker’s commission fees, as they can be costly.
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This article is updated from its original publication date of May 5, 2017.
This is not intended as legal advice; for more information, please click here.
