Finding investors can help your business at many different stages. Many business owners turn to personal investors to help launch or grow a business with financing to purchase new tools, lease new space or increase payroll.
For example, maybe growing demand means your construction business can take on more projects but you need money to purchase new equipment in order to take that step. A beauty salon might need more capital to expand into a larger space that can accommodate more customers.
If you’ve been thinking about getting more capital for your small business, there are a couple of options you can explore, including finding personal investors for your small business.
Start with the U. S. Small Business Administration. The SBA helps small business owners, and one part of that is through providing capital via both loans and grants. (Learn more about small business grants.)
Another option is to go through large financial institutions, such as banks. However, many large institutions aren’t always suited to meet the individual needs of small business owners. Big institutions make more profit on bigger loans, which small businesses are often a low priority.
Recent data found that less than 29% of small business loan applications get approved at large banks with over $10 billion in assets.
Why small businesses look for private investors
When it comes to banking, you probably don’t want a one-size-fits-all solution. Many large banks can’t always look at small business applications on a case-by-case basis. That’s why private investors can be a good alternative.
Private business investors are individuals or companies that use their own money to provide funds to other businesses, intending to get a return on their investment.
Benefits of a private investor
Small business investors can often offer more flexibility than traditional large institutions, especially when it comes to funding options. A private investor might only have a small portfolio of a dozen or so small businesses they are helping. That means you can get more individualized attention during the application and funding process. Plus, some business investors act as mentors, offering valuable business advice as you’re growing your business.
Types of private investors
As you explore ways to fund your business from personal investors, you have some options. Carefully review what’s available to you and the solutions that might best fit your needs.
Angel investors: These are private individuals who provide start-up funds for a business to grow. In addition to looking for a return on their investment, often from a percentage of owner’s equity, they tend to take a more active role in making business decisions.
Crowdfunding websites: With crowdfunding websites, many small business investors will pool their money toward capital for your business. Generally, these investors are not looking for any equity in your business. However, some equity crowdfunding platforms do.
Friends and family: There is always the option of asking your friends and family for capital. It’s crowdfunding on a smaller and more personal scale. If you choose this route, it’s very important to let them know about the potential risks and keep all business discussions professional.
Private investor loans: These are loans from people or companies, not through banks. Generally, the investor is looking to help your small business grow and will ask that you pay back the loan, plus interest, within a set period.
Private Equity: This is when private companies or individuals invest funds in your business in return for a piece of the business, usually in the form of owner’s equity (the owner’s right to the assets in the company). Often, the investor’s goal is to sell their stake a few years down the road for a profit, assuming the business continues to grow, which means you aren’t paying back a loan.
How to find a private investor for your small business
Once you’ve carefully considered your options and have decided that finding business investors is the path you’d like to take, you want to prepare before you jump.
Before you approach any investors, do your homework and research. Make sure you understand how the investors operate and what they need to learn more about your business. Take the time to prepare and organize essential documents, including details on operations, profit and loss statements and tax returns.
It’s also a good idea to have an updated business plan that details how you plan to use the money and the potential benefits it can provide to your business.
Now comes the hard part — how to find investors. The good news is there are many places to find willing investors; you just have to know where to look. Here are a few places you get started:
Your network: Even if you aren’t planning on asking friends and family for capital, you can ask them if they know of any small business investors they’d be willing to make an introduction.
Community groups: Chances are pretty good that there are a handful of investors living in your local area. Contact your local Chamber of Commerce and other trade or small business-related community groups to see who is out there.
National and local associations: You can find dedicated angel investing or private equity groups across the country. These include the Angel Capital Association and the American Investment Council.Crowdfunding platforms: There are a few well-known sites for crowdfunding, including Kickstarter, Indegogo and LendingClub.
Advantages and disadvantages of working with a private investor
As with anything, there are always some pros and cons when it comes to private investors. You want to consider these as you decide if finding a small business investor is right for you.
Here are a few of the advantages:
- Working with a private investor means you get to pick who you’d like to get your investment from.
- Since these investors are aware of the risks, they will often offer more flexibility when it comes to loans. If you can’t meet the strict standards of a large lending institution — maybe you don’t have a long credit history, for example — a personal investor might be willing to overlook those issues.
- With many private investors, especially those who want equity stakes, you don’t have to worry about repaying any loan as you’re working to grow the business.
However, there are also disadvantages:
- You might end up with less control of your company. Some investors are active in offering advice on the direction of the business, but that can also mean they want to become part of the decision making process. If you’re used to being the only person in charge, that can be an adjustment.
- You also don’t have control over what happens with the equity shares your investor has. For instance, they might decide to sell down the road to someone you’d prefer not to work with, and you could not have any say.
- Your investor might have specific benchmarks or goals they want your business to meet, so be prepared for the possibility they will want documentation and updates from you regularly.
How Next Insurance helps guide and aid your small business
Many private investors will want to know your insurance policies are sufficient and up to date before they finalize a deal with you.
Next Insurance can help you get the right insurance for your business with a painless and seamless online application. We serve thousands of different types of businesses and offer support from our U.S.-based insurance advisors.
It only takes about 10 minutes to share a few details about your business, review your insurance options, purchase coverage and get a certificate of insurance.