Usually, startups seek investors to help foot the bill for their projects. investors are unique players in the growth process of a business. The level and quality of their involvement can ultimately help determine a company’s success or failure.
It is necessary for entrepreneurs to take the time to learn about the types of investors available and how to use best practices when approaching them for funds, this common investor types for startups.
Types of Investors in Business
Banks are a classic source for business loans. Loan-seekers will usually be required to produce proof of collateral or a revenue stream before their loan application is approved.
A bank loan may be available to help you with startup costs. But banks want to see a detailed business plan and a thorough description of your business and its prospects. A business proposal document also states the product or services being offered, your financial and management projections, and how you plan to implement your goals.
It’s easiest to get a loan when you go to a bank with which you already have a relationship. Be prepared to prove financial responsibility and wait the time it may take to process the loan. Because of this, banks are often a better option for more established businesses.
2- Peer-to-peer lenders
Peer-to-peer lenders are individuals or groups that offer to fund to small business owners. it lets people list projects online for consideration by potential investors. This type of investor brings the startup and small business owners together with entrepreneurs willing to help and invest.
To work with these investors, entrepreneurs must apply with companies that specialize in peer-to-peer lending, such as Prosper or Lending Club. Once their application is approved, lenders can then determine the businesses they wish to support.
3- Venture Capitalists
Venture capitalists are used only after a business begins to show a significant amount of revenue. These investors are notable, as they usually invest a substantial amount of money. They gain most of their returns through “carried interest,” or a percentage received as compensation from the profits of a hedge fund or private equity.
Once you’ve proven yourself a bit more, it’s time to consider venture capitalists. This type of investor expects you to show you have a solid business plan. A venture capitalist also wants to see a high return of profit.
Venture capitalists may invest as much as millions of dollars. They will invest the money needed to help that happen. They do that by securing equity capital, or a share in your company. They are betting that the share will be worth more within time and will wait to get a return on the investment.
4- Personal investors
Business owners often rely on family, friends or close acquaintances to invest in their companies, particularly in the beginning. However, there is a limit to how many of these individuals can invest in startups because of legal limitations.
Your friends and family may be willing to lend you the cash to start a business, but before you do, make sure your family ties are strong enough to withstand the pressures of doing business. Have each party sign a promissory note that spells out the repayment terms or, if you are partnering with a friend or family member, sign a partnership agreement.
5- Angel investors
This type of investor is typically an entrepreneur who has enough wealth to help others. Angel investors invest in businesses in which they believe but they realize may struggle to find another financing. There are angels on your side when it comes to seeking outside financing.
An angel investor may buy stock from a company or make a loan. Some serve as mentors and advisors. Some may specialize, such as high-tech angels who prefer helping to bring new technology to the marketplace and may or may not want to actively participate in the company.