Most small business owners don’t realize that all small business capital is not created equal. There are two type of small business financing you can obtain as a small business owner. This includes debt financing and equity financing. Debt financing is when you borrow money from a bank or lender and pay it back (plus interest). Equity financing is when you give up a percentage of ownership in your company in return for an investment. Sometimes that investment could be time (sweat equity), but most of the time it is financial. The percentage of ownership often goes to either a venture capitalist or angel investor.
According to Rosemary Peavler of About.com, Venture capitalists mostly use institutional funds that mainly come from big pension funds and large college endowments to invest in emerging businesses. They invest large sums (often in the millions), while Angel Investors are individuals that invest small sums of their own money (less than 1 million) into startup companies. Before you decide to pursue either a venture capitalist or angel investor, you should seriously consider the following 3 reasons why they may not be right for your small business.
Your business isn’t “high growth” – Investors in this day and age prefer to invest in high growth businesses that will yield returns in the millions in just a few short years. Let’s face it, most small businesses are not yielding high returns in a relatively short period of time. If you’re business isn’t in high tech industries such as bio-tech, software, “green”, internet, or healthcare, your chances of landing an investment from a seasoned venture capitalist or angel investor is slim to none.
You can forget being your “own boss” – Most investors will want to be apart of your board of advisors or directors, attend every single meeting, and have a say in making huge decisions regarding your business. Sure you will still get to voice your opinion about which direction to take your business however, your ideas will be up against the investors. Since you’re using their funds to grow your business, they may be able to get the final say more often than not. If you decide to go against what they want, you risk them pulling out their investment and moving on to something else. (Have you ever watched “Dragons Den” on BBC? I’ve seen this happen before with one of the “Dragons” aka investors).
You will be required to sell or go public – All investors have an exit strategy when they invest in your business. At some point, they will want to sell or public to reap the rewards of their investment. Once they get their return on investment, they will want to on move on to something else.
If you want to stay in control of your small business, you may want to consider other options in regards to financing. Debt financing such as a small business loan or line of credit may be more suitable for you. Small business loans and lines of credit are often better options for small businesses that are not considered “high growth” and where the owners will want to maintain full ownership. Below is a list of the various types of small business loans and lines of credit you may want to consider instead of equity financing:
– SBA Loans
– Unsecured Business Credit Cards
– Unsecured Business Lines of Credit
– Purchase Order Financing
– Accounts Receivables Financing/Factoring
– Merchant Cash Advances
If you haven’t made the final decision or you are simply not sure what type of financing is the most suitable for you business, you may want to consult with a small business finance expert. The best experts can analyze your unique situation and give you an honest and sound advice about what you realistically will qualify for.
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Brittni Abiolu is the Owner & Publisher of www.CapitaLinker.com. Through her website, she serves to educate entrepreneurs and small business owners on how to increase their chances of obtaining capital in the simplest way possible and how to find and connect with the most appropriate funding sources. You can connect with Brittni on Linkedin, Google+, Twitter, Facebook, and Pintrest.
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