Understanding Different Small Business Funding Options
To say that today’s business landscape is confusing would be an understatement. Between the bevy of brand-new startup enterprises to the bankruptcy of some of longest-running and most beloved franchises, it’s a tough time to be a businessperson.Unfortunately, things aren’t easier for lenders, either, many of which are seeing an influx of investment requests and applications that simply don’t meet their needs. While this may be true, small business owners shouldn’t be discouraged. There are still a lot of funding options available to those who know where to look.
You’ve probably heard a lot about angel investors as of late. They’re often a key source of funding for startup enterprises – and there’s certainly no shortage in the 21st century. Despite their prevalence today, there is still a lot of confusion surrounding the typical angel investor.
Here are a few key points to understand about angel investors:
- They usually don’t get paid. Since angel investors often invest in startup businesses and ideas that have yet to be proven, of which 90 percent fail, many of them build the majority of their wealth elsewhere.
- TThey typically only invest between $25,000 and $150,000 on any one project. If you’re trying to secure more than that for your small business, you’ll have to seek funding from additional sources or seek assistance from a venture capitalist, business lender or private equity firm.
- TThey write checks and invest funds out of their own accounts. This is a stark contrast to venture capitalists, who often work with other people’s funds. As such, angel investors are more likely to be driven by their personal motivations and tendencies as opposed to the profit-oriented alternative.
Most angel investors look at a number of factors before deciding on an investment. These factors include:
- Overall scalability.
- Risks associated with direct competition.
- Risks associated with market saturation.
- Expected return-on-investment (ROI).
- Securing the right valuations.
If their needs aren’t met, and these factors go unchecked, most angel investors are likely to pass on the opportunity altogether. But this doesn’t necessarily spell the end for your business or idea – you’ll just have to secure the necessary funding elsewhere.
Traditionally speaking, venture capitalists are the exact opposite of angel investors. While they tend to focus on established ventures and enterprises, venture capitalists are starting to come around and embrace the idea of the startup business. As such, we’ve seen more startup investments originating from venture capitalists since 2013 than any prior time period.
In most cases, established businesses seek funding – also known as equity financing – from a venture capitalist. As an incentive, the investor will assume an equity position in the company on a long-term basis that typically lasts from five to eight years. Most venture capitalists and venture capital firms will only accept an opportunity if they expect to receive an ROI of 25 percent or greater.
It’s also important to note that venture capitalists aren’t working with their own money. Instead, most collect initial investment capital through third-party investors, insurance companies and pension funds. An independent venture capitalist is then responsible for all decision-making and investments regarding the pooled monies.
Many venture capitalist firms will also seek out an active role within the companies that have received funding. This is done to protect their investments as much as possible. Unfortunately, it makes it nearly impossible for small business owners to retain full control over their day-to-day operations or the decision-making process.
Small business loans are furnished by business lenders. The entire industry took a significant hit in the latest U.S. recession of 2008, which led to a lull in the overall number of new startup businesses, but both the number of loan requests and approvals has started to recover in recent years.
Although there is still some ground left to be restored, things are looking up across the entire industry. Numerous factors affect your ability to secure a small business loan from a qualified business lender. Some of these factors include:
- The total amount of the loan. Most small businesses seek loans of $250,000 or less.
- Big businesses are more likely to get more credit. Well-known and established companies are likely to receive most or all of their requested credit. Small businesses and startup enterprises are more likely to receive less than their initial request or nothing at all.
- Some lenders are transitioning to the Internet. While this makes the entire process more convenient, it isn’t all good news. Many of these services offer elevated interest rates or other nuances.
Although small business loans have made it possible for a countless number of individuals to achieve their dreams, more entrepreneurs are seeking out the services of private equity firms more than ever before.
Private Equity Firms
In short, private equity firms make their investments from a pool of money that originates from various investors. Some private equity firms have millions and even billions of dollars to work with – making them the ideal funding source for everything from fashion to aerospace.
Private equity lenders are often confused with venture capitalists, but there are some key differences. For starters, private equity typically provides funding to jumpstart company revitalization, rebranding or development. It’s seen even less amongst today’s startup businesses than venture capital.
Borrowers are also more likely to receive private equity funding if they’re positioned in traditional industries like manufacturing, food service and similar lines of business. Conversely, venture capitalists often side with next-gen technology, early concepts and unproven ideas.
In certain cases, a private equity firm will opt to buy a company outright. While such an act has both positive and negative connotations for a small business, startups and community-centric businesses often try to avoid buyouts and, as a result, try to secure their funding elsewhere.
Finding The Best Source For Your Company
While it’s difficult to locate and secure the best possible funding source for your company, it’s a necessary step on the road to success for any new or established company. It’s ultimately up to you to ensure that you’re pursuing the right lenders, asking for an appropriate amount and capitalizing on the opportunities that do come your way – or else you’re only making things harder on yourself.
If you’re seeking funding options for your small business, let HJR Global be your partner. We can help you with every phase of the creation and solidification of your business, including assistance with securing funding. Contact the HJR Global team today for more information.
Click here to read the previous blog post.