Funding & Investors: An Overview
Funding & Investors as a whole is an important aspect of owning a small business. Not having enough capital to successfully start or grow a business can have serious consequences. Having a good business plan in place before you seek financing can help you avoid many of the pitfalls. Most business owners do not fully understand the requirements that they will need to fill out for obtaining financing, and end up having to pay unnecessary fees or penalties. Having a solid business plan can help you avoid these problems, and give you the information needed to better understand your options when seeking capital.
As previously mentioned, the majority of investors focus primarily on two factors when considering a business: liquidity and risk/reward. In most cases, if a business is not liquid enough to be worth investing in, there is little to no chance of recovery. Liquidity refers to a company’s ability to pay for goods and services it provides to customers. If a company does not have enough cash on hand, then it will not be able to repay loans or make other capital investments, therefore becoming unable to stay afloat. On the flip side, if a business has a large amount of debt, then it is most likely too risky to invest in.
Risk/ Reward plays a much larger role in determining whether or not an investment is a good fit. Many new businesses are started with a great idea, but do not have the necessary resources to keep the business going. Therefore, if they do receive additional funding, it is usually from investors that expect high returns quickly. The only problem is that this strategy rarely works out well for the company.
Funding & Investors will typically want to see tangible results from a business before investing in it. A company must show it has a positive cash flow, sufficient employees, and sufficient products to sell. Without tangible results to back up these claims, investors will likely shy away from funding a business. It is also important for a business to have a steady cash flow, because this is often what will attract a significant number of funding companies. For example, a business that shows consistent profits will be much more attractive to funding companies.
Capitalizing on Small Businesses. In order for investors to be comfortable financing a business, it must fit the investment formula. Investors prefer to deal with businesses that are mature, have a history of success, and/or can offer tangible assets that are collateral for funding. The bottom line is that there are many factors that determine whether or not a business is a good fit for an investor’s portfolio.
As with any financing decision, an investor’s comfort level will vary greatly based on the business’ credit history, potential return on investment, and the level of risk they feel comfortable with. Additionally, investors who are unfamiliar with the industry will often ask for financial documents, which can help them to better understand the business. However, no matter how comfortable you may be with a particular business, it is vital to still seek funding according to your own personal comfort level. In many cases, investors will look to accredited public finance sources, non-traditional business lenders, and venture capitalists in order to provide the necessary funding for a new business.