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Funding For Small Businesses Via Angel Investors

Outside of receiving a loan from the Small Business Administration, the most common way to have your business financed is through the use of an angel investor. In many instances, entrepreneurs turn to these private financing sources because they are able to provide flexible financing terms with the intention of being able to cash out their investment at a much later date. Unlike SBA loans, an angel investor is primarily seeking to profit from the capital appreciation that is associated with your business. As such, if you do not qualify for small business financing through a normalized method of lending then it is may be in your best interest to work with a private funding source to assist you in obtaining the capital that you need in order to start or expand your business activities. 

Throughout our series of discussions, we have primarily focused on the benefits of working with an angel investor instead of a small business investor. Of course, in addition to the capital that they provide, a small business investor or angel investor is able to provide you with a substantial amount of guidance and information as it relates to the ongoing operations of your business. The Small Business Administration is generally able to provide you with a similar amount of information, but an angel investor that has a stake in your company is almost more than willing to provide you with a substantial amount of direct guidance as it pertains to bringing your business to profitability or generating a positive cash flow. We are going to continue to discuss the merits of receiving funding for small businesses via angel investors through many of our future articles.

Of course, the primary drawback to working with an angel investor is that they are going to want to have a significant amount of say as it relates to their investment. This is primarily due to the fact that your private investor is going to become a major owner in your business. Additionally, the investment contract that you sign with a private investor is going to dictate the level of day to day control that a potential third party funding source has in your business. As we have discussed before, when you sell a significant portion of your business to a third party investor you can expect that they are going to want to sit on your board of directors while also being able to have selective control functions as it pertains to how the business is run on a day to day basis.

As always, you are going to want to make sure that obtaining small business funding via the use of an angel investor is in your company’s best interest. One of the most important things to consider is not only the cost of capital as it relates to an equity sale of your business, but also how much control you will have to give up when working with a third party funding source.

Small Business Lending in a Cold Climate

The current lending criteria in today’s financial climate can be particularly challenging for small business borrowers. For the these borrowers, an increase in rates can be a real hurdle to obtaining any sort of finance. Established enterprises with a long history are finding it challenging to invest in the growth and expansion of their business. Updating to new technology can require a significant injection in capital funds that many operators may find hard to get their hands on.

Here are some ideas for easier small business financing.

Visit a broker – Small businesses should increasingly look to use brokers to organise their financing rather than going directly to banks. Brokers usually have a better understanding on the types of financing available and better access to a wider range of loans. They also have established relationships with lending institutions that many small business owners may not be aware of.

Lease equipment – instead of applying for a loan, equipment finance and leasing can help a business upgrade their technology and help to cover operational expenses. Many businesses may not be aware that leasing can extend beyond IT equipment finance and is available across a range of industries including medical, veterinary and industrial as well as for most office equipment.

For many these operators, speaking with a financial advisor or accountant will give them a better understanding on the type of financing that is available and how they may be able to account for their expenses in a cash-flow friendlier way. Borrowers looking to get out of the cold in the current lending climate can find a number of ways to get on with their business.

Prior Business Experience Can Be Helpful When Starting a Small Business

We recently worked with a client who wanted to open a new restaurant. After several discussions, we learned that not only had she owned one restaurant but she had owned several restaurants in the past and had sold her last one in the late 90′s. Would she still be considered a start up business? Maybe, because it had been quite some time since she last owned a restaurant but her prior Business Experience would help her significantly when applying for Small Business Financing, especially in today’s tough economy.

Many banks and finance companies are holding out on lending money to businesses unless they have very high credit scores and have been in business for several years. This can be very disappointing for new business owners who are in need of funds and would have been able to get them 6 months ago. It is scary how quickly the financial markets have changed and tightened their belts!

Our client, who was very anxious to finance some equipment for her new restaurant, went into full details on how successful she was with her prior restaurants. She also discussed how her new location was one of the best in her area which was a sure win for her new restaurant. While this information makes for a great story, it does nothing to help get approved for an equipment lease.

The main problem we were having in helping her get financed for this new equipment was her Fico Score. It was on the weaker side but she was able to get a relative to co-sign. We thought the strong credit of the co-signer was going to be an instant approval until the finance company came back asking for proof of our client’s prior Business Experience in the restaurant industry.

Unfortunately, our client had recently moved back to the states and all of her documentation was still in boxes over-seas. After several minutes of brainstorming, we were finally able to find some older Articles of Incorporation online under her state’s Secretary of State website, which allowed us to get her the funds that she needed for the equipment.

As you can see, it is very important to keep documentation, especially if you ever plan to re-enter the business scene. Financial institutions are very strict right now and do not want to let go of their money in this high risk economy.

If you are looking into Starting A Small Business, do your best in making sure all of your ducks are in a row or you may be looking at a long road of “No!” and “Unfortunately, there is nothing we can do at this time.”