If you are looking for business funding for your business, you are probably not to concerned about where the money comes from – as long as it comes! However, there are a variety of different methods of finance, and each has it’s own distinct pros and cons.
So if you are in the market for a business investor, and you aren’t sure how the various types of deal options work, read on, and make an informed decision when the time comes.
Traditional Debt Finance
Traditional debt finance is the first type of investment that most business owners think of when they are looking for investors to fund their business ideas. This type of investment is your standard bank loan, and it comes with the usual monthly repayments, as well as interest.
Aside from the worry of having to pay that loan back while you’re working on starting your company, you also need to remember that often, you will need some form of collateral to secure this type of loan, and that banks around the world have tightened up their lending criteria, so it’s got a lot harder to get business finance!
Equity investors could be any one of a number of people or organisations, including venture capitalists, angel investors, business incubator programs, or many others. These types of investors often don’t require you to pay debt back, but rather, take an equity or ownership stake in your business.
These types of investors recoup their investment when you sell or list your business, and that means that while you’re building your company, you don’t have to worry about repaying a loan. There are drawbacks to equity investment too, however. First, you will have to give up a stake in your company (and usually, the higher the risk, the more you’ll have to give up.) Equity investors also tend to focus on the idea, and the team, so if you’re looking for this type of funding, your business plan had better be amazing, and knock their socks off!
Equity investors may provide money only, in return for their equity in your business, or they may choose to take an active or semi active role. Whichever it is, however, make sure you discuss it before you sign on the dotted line, so you can avoid nasty surprises later on!
Aside from the two main types of business investment deals, there are also a wide variety of ‘hybrid’ deals out there. These deals may include some debt finance, and some equity ownership. They may also be structured with a deferred payment plan, and they may be more flexible in terms of the exit strategy for the investor. (Instead of selling or listing, for instance, they may allow for management buyouts.)
Do Your Homework, and Choose Carefully
As you can see, there’s a lot more to consider, when wooing investors, than just how much money you need! You need to weigh the pros and cons of each potential investor or deal, against what you need, and what you’re willing to risk.
Decide whether you would rather have to repay a loan, as apposed to giving up a portion of the ownership of your company. Then consider your business idea, and your financial position. Are you more likely to appeal to risk averse lenders, or to people or organisations that look for innovative ideas?
Understanding how the various types of investor operate and what they look for and demand in return for their investment, not only makes finding an investor easier, but also ensures that you will get the best possible deal for your business’s success.
This post is sponsored by Caban Investments – Caban Investments is an Impact Venture Capital firm, operating across Sub-Saharan Africa. They work with seed, early, and growth stage businesses with the intention to positively impact the environment, societies and economies they operate in. Website: www.caban.co.za