Finding capital, particularly from a bank, can be one of the most difficult challenges for small business owners or those who are already in the startup phase. Appropriate funding can mean the difference between success and failure for new businesses. A new business frequently need funding to cover expenses for a variety of items, including office space, staff, equipment, and insurance.

It can be challenging to obtain financing from large lenders during unpredictable periods, as as the COVID-19 epidemic. The percentage of business loans approved fell to 13.3% in October 2020. Even if you are successful in getting a loan, you must repay the funds. There is no risk taken on by the bank.

But don’t let that discourage South Africans. Finding personal investors is one of the many ways to get financial assistance. Finance for businesses is provided by private investors, typically in exchange for a stake in the company. Personal investors care about the success of your company because they have an interest in it. What are your alternatives, though, for picking the ideal private investor for your company?

The information provided below will assist you in navigating the world of private investors and securing the funding required to launch your small business successfully.

Benefits of Personal Investors

Unlike a bank, which lends you money, private investors join your team. When you first start out, this can be really beneficial. You can develop your firm by making wise business decisions with the assistance of your personal investor.

Even investors that specialize in your sector are possible. Many private investors want to be sure they have a thorough understanding of the sectors they invest in. A knowledgeable individual in your profession can be a huge asset. An investor who specializes in your industry, such as a freelance writer creating a limited liability business (LLC), might point you in the direction of clients who will pay you more.

Additionally, finding a private investor rather than a bank loan carries less risk. Imagine having your food truck finally operational during the COVID-19 pandemic. You observe as consumers eat out less, costing your company money. You would still be required to pay interest on a bank loan. Everyone would lose their original deposits if personal investors were used, but you wouldn’t be responsible for making the money back.

Private investors choose to support your company because they have faith in it. Having that kind of support can help you persevere through the challenging initial phases of establishing your company. Banks, on the other hand, take your credit history into account when determining whether to lend you money.

Cons of Personal Investors

Getting private investors has several drawbacks. Selecting the ideal investment for you might help you mitigate some of these risks. Here are a few explanations as to why a personal investor might not be the best option for you.

You cede some control over the company when you take funds from a private investor. They finance your business, and they’ll probably demand a say in how things are done. Unfortunately, they might not always share your vision for your business. Some investors may view you as an inexperienced small business owner and attempt to persuade you to take specific actions, such as selling your company to a corporation to boost revenues.

Some investors could have very high standards for your company. It might be stressful to be under constant pressure to make earnings. After all, you didn’t establish your company to satisfy customers. Get a pro to assist you in creating a practical and realistic company strategy because of this.

Your earnings could also be impacted by private investors. You will have to give private investors a percentage of the company’s profits in exchange for their protection against the risk of taking out a bank loan. The amount of profit an investor will take depends on the stage of development your business is in. For instance, an investor can ask for 40% of your profits to cover the risk if your product is still being developed.

4 Types of Private Investments Available to Small Business

You must establish where your firm is now and how you want it to develop in the future before determining which categories of private investors to approach. Every category of personal investor has various objectives and motivations for investing in your company.

Angel Investments

High-net-worth individuals that invest with their own money are known as angel investors. They invest their money and buy a portion of your company. They’ll also participate in your business decisions because they desire a high rate of return on their investment.

When your company is in its early stages (the seed stage), an angel investor may choose to invest in it with either an equity share or a convertible note. Equity translates to ownership in your business. An angel investor who purchases an equity position in your company is purchasing stock in it. But first, you and the angel investor must reach an understanding regarding the value of your business. For instance, if you and your business partner decide that your firm is worth $500,000, $125,000 would buy you 25% of the company. Simply add up all of your company’s assets, then subtract all of your obligations to get its net value.

What happens, though, if you’re a first-time business owner and angel investors are reluctant to fund your venture? They could use a convertible note in that situation. A convertible note functions similarly to a loan. Your money from the angel will accrue interest up to a mutually agreed-upon date. When the loan is due, the angel has the option of asking for repayment or converting it into a share of your company. Convertible notes provide investors and business owners additional time to assess a company’s value.

Angel investors become company stockholders. By making them an offer equal to the value of their ownership stake in the company, you can try to purchase them. They’re under no duty to take you up on your offer, though. You are not required to return the investor’s money if your business fails, but they may be eligible for a percentage of the proceeds from its liquidation.

Venture Capital

You can try to get in touch with a venture investor if you require more financial support for your company. Investors in venture capital don’t use their own funds. Instead, they work for companies that invest the enormous investments made by powerful corporations and wealthy individuals.

Venture capital businesses deliberately take on significant risks in the expectation of making huge rewards. Venture capitalists, like angel investors, have a say in how your business is run on a daily basis. For instance, a company will probably modernize your accounting procedures to guarantee the company is as prosperous as it can be. For new business owners who would prefer not to manage their own finances, this can be a benefit.

You may be required to give these investors a portion of your company’s eventual value even though you are not required to repay them if your business fails. Since they have a lot of money to use as leverage and are free to reject any offer you make, buying them out can be challenging.

Investments in venture capital can be enormous. Millions of dollars will be invested by businesses in the right company. But because there is so much money at risk, businesses are very picky. They want to be certain that a business is already achieving some level of success. They may invest in a company, though, if it has enormous growth potential. You most likely won’t be able to use venture capitalists if you’re a freelance artist. On the other hand, you could be able to attract the company’s interest if your startup creates software that has a high potential for future value.

Many venture capital firms will specialize on particular areas to further reduce their risk. This allows them the ability to not only learn everything there is to know about a given topic, but also to concentrate their investments in areas with room for expansion. A company might avoid investing in industries like restaurants and exclusively fund technological startups.

Being ready is more crucial than ever when dealing with a venture capitalist. If you succeed in getting a meeting, be prepared with a solid pitch, a detailed business plan, and answers to any inquiries that may arise.

Private Equity

You won’t need private equity firms very much if your small business is just getting started. These companies search for companies with a million dollar valuation and a history of consistent growth. Large investments are made by private equity firms.

These lending clubs finance their ventures using capital provided by limited partners (LPs). LPs might range from affluent people to endowments and insurance corporations. Private equity firms don’t seek out enormous returns in risky enterprises like venture capitalists do. They want to profit from the dependable expansion of well-established businesses. They just care if a company has a track record of success, regardless of what it sells.

If you need funding for a new strategy to expand your business or if you want to sell your company, you might turn to a private equity firm. These companies might purchase all or a portion of your company. They seek to acquire and dispose of businesses, gain from the flotation of a company’s stock, and split the profits of already prosperous enterprises. As you go about steadily expanding your business and preparing it for success, keep this option in the back of your mind.

Federal Government Programs for Private Investments

The federal government has some excellent resources if you don’t know where to look for private investors. To find out more about the business funding programs it provides, try visiting the U.S. Small Business Administration (SBA) website.

SBICs (small business investment companies) are privately held, but the SBA guarantees their funding. This indicates that the SBA acknowledges an SBIC’s subject-matter expertise. Additionally, it means that the SBIC’s risk is reduced because the SBA may increase its participation in a small company by twofold.

For instance, the SBA would provide an additional $1,000,000 for an SBIC to invest in your new financial consulting LLC, bringing the total investment in your company to $2,000,000. The SBA would also guarantee that the SBIC has the financial expertise necessary to support the success of your company.

Frequently Asked Questions

Q1. Are private investors and small business investment firms (SBICs) the same?

Private investor companies are SBICs. The SBA guarantees and oversees these accredited investors. Although the federal government does not actively invest in your company, it does provide resources for obtaining funding.

Q2. How frequently are investors paid?

You and your investor can decide how to pay each other. Your investor can receive a percentage of the monthly or even quarterly profits from your company.

Q3. Are you able to bargain with investors

You and your investor are free to bargain. Actually, doing so is in your best interests. You might disagree on issues like the worth of your business. You shouldn’t take a lowball offer for a portion of your company.