Small Business Investors: Making a Golden Connection

So you have a great idea in mind and would like to convert that idea into financial success. You will need to start a business to transform your idea into a product - and this is where things could get a little difficult.

To Start a Business, You Will Need Capital

Starting a small business takes more than just having a great idea. Depending on your idea and the area where you plan to start your business operations, you will probably need money (capital) so that your idea can take shape.

This is where investors can enter the picture.

If Your Bank Can’t Finance Your Dream, Then Try an Investor

Banks will be wary of approving a small business loan unless you have substantial collateral, especially because of the sub-prime crisis. The prospect of losing money on bad investments has rattled Wall Street to the bone.

Banks will also require the financial statements of the past 3 years. This could be difficult for you to come up with, especially if you are a start-up entrepreneur.

In such a case, an investor could be your best – and only – choice.

What Does An Investor Do?

An investor will normally finance up to $500,000 in your small business after checking out your idea. If he/she likes the concept, then the investor will finance your start-up business in exchange of a part of the profits that you have laid out in your business plan.

It is essential that investors see some potential in your idea – otherwise they will reject your plan. You may need to approach several investors before any one investor is convinced to give you that golden handshake.

There are several factors that need to be fulfilled before approaching any investor.

You Should Have a Concrete Plan

Your business plan should be extensive and detailed with a comprehensive market study, projected sales and profit figures, potential pitfalls and ways in which you plan to overcome them. You should also have forecasted your break-even point and the timeframe in which it will happen.

The art of presenting the plan is also very important. Your plan should be presented in a professional manner in order to convince the investor that your business model is sound. The profit margin that the investor could earn by investing in your business should also be mentioned in your business plan.

You should also specify the different members of the management team (and their experience) that you plan to employ in order to ensure that your idea has an air of credibility.

If no one on the management team has any business experience, it could be a red flag to a potential investor.

Your Investor Might Decide Between Debt and Equity

Even though some investors might decide to give you a loan [debt], most investors will prefer to become a shareholder in your business venture [equity].

This means that you will no longer be the sole owner of your business – and in some cases, you may have to consult your investor on any major decisions regarding your small business.

For this reason, you need to think carefully and do some research on your proposed investor before making them a part of your project.

From A Golden Connection to Saying Goodbye

Your investor might want a definite time period in which they would like to invest, recover their investment, book their profits and say goodbye to you and your business.

You will need to provide the complete details of your proposed business plan, so that both of you can part ways after the business becomes stable by the end of that time period.

Making a golden connection with investors is about more than the money. Use the tips above to make sure that the relationship is beneficial to everyone involved.

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