When loans from your friends and family will no longer
cut it, angel investors can help bridge the gap between
starting up and making it big.
The first options are obvious: max out your credit cards,
take a second mortgage and cash-in on all those favors you're
owed by close friends and family. But these initial contributions
will only take you so far. You'll need a bigger investor if
your business is going to really thrive. The good news is
there's money out there for the taking, and the following
sources are an excellent place to look to get the outside
capital your business needs to succeed.
Venture capitalists will finance part of your business in
exchange for a share of the venture (typically a 2 percent
management fee per year and up to 20 percent of any profits
their funds make). Generally, they are seeking investments
with high growth potential that will give them a high return
on their investment (say returns of 40 percent per year, or
more). As such, a lot of venture capitalists invest in businesses
that deal with cutting-edge technology or biotechnology fields.
Venture-capital firms have money to spend, but unless your
business is already fairly established, it may be hard to
"Most venture-capital firms in America will now consider
only deals in which they can invest at least $7 million,"
says Jeffrey Sohl, director of the Center for Venture Research
at the University of New Hampshire.
In fact, in the United States, venture-capital funds invest
an average of $6 million in each business, according to PricewaterhouseCoopers.
Smaller businesses seeking start-up funding are likely better
off beginning with angel investors (see below).
There are an estimated 350,000 angel investors in the United
States, according to Sohl. Combined, they invest about $30
billion a year in 50,000 ventures, with an average of $600,000
per enterprise. According to The Economist, a typical angel
investor will invest in anywhere from five to 10 new ventures,
with anywhere from $25,000 to $250,000 invested in each.
Angel investors can be entrepreneurs themselves or successful
professionals, and while they do seek a return on their investment
(terms are set on a case-by-case basis), they also like to
share their contacts, connections and expertise to further
the businesses of people they take a liking to. Because the
wealthy are growing increasingly interested in angel investing
(for tax breaks, among other reasons), so-called angel networks
exist across the United States to help match up potential
Standard bank loans can be hard for entrepreneurs to
secure, but an SBA microloan may be easier to acquire.
Bank Loans and Microloans
Securing a bank loan off the bat is not always easy for a
start-up business, generally because the risk is perceived
as too high.
"It's a game of probabilities," says Mike James,
executive vice-president of the business-banking group at
Wells Fargo. "As a banker you work on very thin margins
... banks can tolerate defaults on up to 5 percent of their
loan portfolios. The failure rate of start-ups is much higher
Even having collateral is not usually enough in itself, says
James, because "we don't want to be in the liquidation
business." However, it's possible to get a bank loan
for your business if you:
Have good credit ratings (both for your business and
Hire a certified public accountant to tell your business
story in numbers
Conduct presentations at your business site (not at the
bank) and involve key employees
Offer collateral and cut or eliminate your salary
Small businesses may have an easier time securing a mircroloan
under The Microloan Program (which was developed by the Small
Business Administration (SBA) in 1992). Entrepreneurs can
borrow under $100 to a maximum of $35,000 -- a particularly
useful source of start-up funds for businesses that have never
borrowed from a bank.
Small Business Administration Loans
Though the SBA does not provide funds directly to entrepreneurs,
there are several loans available through a loan officer at
your local bank or credit union (such as the Microloan Program
Generally speaking, in order to qualify for an SBA program,
your business must have less than $7 million in tangible net
worth and less than $2.5 million in net income. Also, most
banks require two or three years' worth of financial statements,
along with some owner's equity in the business, before they'll
lend to your business.
Finally, while securing funding for your new business may
seem like the most important task at hand, be sure to carefully
analyze the offer, no matter what the source, before accepting.
"Finding out about your investors before you sign them
up is critical," says Sohl. "And you have to understand
what everybody wants from the business. It's a marriage without
the possibility of divorce. If you can't make it work, bankruptcy
is the only alternative."
You Have What it Takes to Start a Successful Home-Based Business?
Means Business: Ever Wonder Why Most U.S. Businesses are Established
September 14, 2006