Meet Angel Investors | Small Business Financing Options Series
Meet Angel Investors | Small Business Financing Options Series
Meeting Angel Investors: You Have To Be Ready
Let’s say you’re running a small business, and you’re looking for capital. There are a few options that are open to you, and one of these options is what we’re going to focus on today, it’s getting angel investors to put money into your business. Now you might be at various stages of developing said business; maybe you’re looking for financing so you can start a laundromat business, maybe you’ve already taken the plunge but you need a loan to finance your new business, maybe you have a business that’s already up and running and need to do a little bit a creative financing to land a business line of credit to expand. No matter which of those situations you’re in, you need to know what angel investors will be looking for before they agree to invest their money into your business.
In order to find angel investors who will be willing to invest money in your company, you have to demonstrate that your business has an excellent potential of allowing them to achieve a significant return on their investment; they will base their decision on five criteria.
Market potential. Your company has to be able to generate significant annual revenues from the financing that will be put at your disposal. An angel investor has to see the potential to generate hundreds of thousands of dollars (at the very least), and more realistically a few million dollars in revenue. That’s the level of revenue that will get them interested, and it will be up to you to show a clear path to the investors as to the possibility of them making multiples of their initial investment in financing your company.
Barriers to entry. Anything that shores up your position in your market, and consequently makes it harder for a competitor to steal market share from you, is a barrier to entry. For example, if you develop a product and its start up cost is upwards of $5 million, then the high development costs can prevent may competitors from entering your market. Similarly, if you develop a product and get it patented, that’s a barrier to entry because no one else can sell it but you. Other barriers to entry can include scarcity of skilled labor, an ideal location, or a client base that’s locked into long term contracts
Strong management team. You have to be ready to show that your business is going to be (or is being) run by a team that is competent, has relevant experience, and a proven track record. When you meet your angel investors, you have to set them at ease and make them feel comfortable about the level of expertise of your management team and its ability of your personnel to run the business profitably.
Exit strategy. Your exit strategy is what’s going to actually spell “profit” for your angel investors, so they will be paying special attention to that. Basically, most of the time it boils down to you triggering a buyout of your company, or having the company go public. It goes without saying that if everything has been carried out successfully, your company’s value will have increased many times over, and the return on their investment will follow a similar trend.
Proximity. Angel investors have a preference for companies that are in their vicinity. Financing local companies allows angel investors to pay them a visit every now and then, as well as participate in board meetings and other meetings as well. According to the Center for Venture Research, 70% of angel investments are made within 50 miles of the investor’s home or office.
Other small business financing options
Now you may realize that probably you’re not yet ready to meet all those criteria. Well, that doesn’t mean that you don’t have other small business financing options. Here’s a glance at a few others:
Small Business Equipment Lenders
The equipment and technology that you need to successfully run or expand your business can be very costly. The fast pace of change can mean that your equipment can quickly become obsolete. Lenders that specialize in equipment financing understand this, and in many cases, that’s what they specialize in. They’re the best at appraising your needs and funding your equipment needs. You stand a good chance of getting a very good deal that matches your needs and benefits your business’s bottom line.
Commercial Mortgage Lenders
The purpose of a commercial mortgage loan is to finance or develop a commercial property/business. A mortgage lender will provide you with the necessary funds to complete the transaction. As you pay off the loan, the interest amounts to the price of the service. In addition, the business/property may be taken as collateral against the loan. There are several different types of mortgage lenders which will offer you their services: commercial banks, mortgage companies and credit unions are the three major ones. Each of these institutions will offer you a variety of loan options, and all might quote you different prices. It is recommended to contact several different lenders in order to find the most favorable and convenient rate/loan type.
Working Capital Loan Providers
There are five common types of a working capital loan. They include:
Equity: Obtained from personal resources like equity in your house, funds from friends or family members, or from angel investors.
Trade Creditor: A trade creditor will extend a loan to you so you can purchase a large quantity from their place of business. They will often check your business credit history before extending credit to you.
Factoring/Advances: You can sell future credit card receipts for instant capital if your business accepts credit cards. Another option is to sell your accounts receivable to a factoring company who handles the collection.
Line of Credit: Your business can apply for a bank line of credit, giving you the ability to borrow for short term needs. Good business credit scores will make it easier for you to get approved when you apply for a line of credit.
Short term loan: A bank can also extend credit to allow you to purchase inventory for a season. This note will typically be less than a year. Again, good established business credit scores will nearly guarantee access to this kind of funding.
Creative Financing
Accounts receivable loans and equipment loans can use asset, accounts receivable and equipment as collateral to secure a small or medium business loan. A business may also sell their equipment to a lender for cash (sell and lease buy back), then lease back from the lender to acquire fast cash.
Matching your needs with a specialist will take away the frustration of going to the wrong financing source and being turned down. Running a business means being creative, and the same holds true with business financing. You have to get creative and find lenders that what to satisfy you and garner your business.
Leave a Reply