How to Find the Best Investors for Your Small Business

Big ideas can only take your business so far. When a contractor asks for a first installment, or your first big payroll is due, you have to show them the money—fast. At times like these, an entrepreneur must turn to investors to keep his or her company moving forward. Here are some tips on how to find the best investors for your small business.

Your inner circle

Why go hunting for funds when you already have potential business partners saved in your contacts? There are several advantages to turning to your friends and family members for a small business loan or business partnership. The terms involved in these scenarios are often more favorable than those that any lender might offer. Additionally, the approval process tends to be much simpler when your inner circle is involved.

Still, there are drawbacks to working with your friends and family members. Think of the strain a business partnership might have on a relationship that already has its stress points. If your business struggles down the line and you need more time to pay off loans, your actions could lead to the end of a friendship or a slew of uncomfortable moments during the holidays. Sometimes, the money is not worth the potential stress and complications.

Angel investor

First-time solopreneurs sometimes need the help of a seasoned pro to get a company going. That is where an angel investor comes in. In exchange for a 20–25% stake in your business, angels provide the money you need to keep an operation alive or expand your reach into new territories. Besides cold, hard cash, they also bring years of experience to the table.

Viewers of Shark Tank are familiar with how this principle works. You first have to convince a wealthy business professional that your company can expand his or her portfolio. This process involves extended discussions between your team and the angel's representatives. When the terms are fair, both sides win—and you end up with an excellent mentor in the bargain.

Venture capital

While angel investors are often the answer for businesses that are struggling to take the next big step, venture capital firms tend to take an interest in more established brands. These investors usually have minimum revenue requirements and want the ability to influence what your company does next. They also have an exit strategy, which enables them to break ties with your business in less than five years.

Small business owners should have an exit strategy of their own when turning to venture capital firms for help. Anything can happen in a few years that can negatively impact your operation, including economic downturn or a change in industry regulations. Financiers without an emotional investment in your business will have no trouble selling a stake to cut losses.

Alternative financing

One of the newest trends in business financing is the alternative lending industry. Entrepreneurs no longer have to wait for loan approval from a bank or worry if their credit is good enough. Online lenders may approve a small business loan in a matter of hours and do so without a lengthy application process. On the flip side, entrepreneurs need a clear exit strategy.

You cannot take on a bridge loan without knowing exactly when your next revenue infusion is coming. Penalties may be severe. Other alternative funding methods such as crowdsourcing and presale offers may also appeal to small business owners. Overall, it is crucial that you deliver on the promises you make in a timely fashion, because failing to do so could hurt your brand's credibility in the long run.

Every new business needs investors in order to take the next step and hit the ground running. For more small business financial insight, check out the Small Business Financial Services center.