If you’re looking for funding to launch a startup or scale your business, you don’t necessarily need to go down the traditional route of getting a loan from your bank. Another option is to look for people who are willing to invest in your business.
Your investors might loan you money at a more competitive interest rate, or they might own a stake in your business, meaning they earn money when your company makes a profit.
This guide explains all you need to know about how to get investors for your business.
Investments for a small business can help your business to grow, improve and succeed. The funds you receive can help you to buy modern equipment, for instance, which could help to speed up processes and ensure you keep up with competition and demand.
It could also enable you to hire more staff as well as invest in training and development of existing team members so that they learn valuable new skills. You might also choose to invest in a better onboarding programme or improve employee benefits such as flexible working or season ticket loans which can make your company more attractive to potential new employees.
Depending on what sector your business is in, investment can also help your company pay for advertising and marketing or invest in research and development.
A good place to start might be to ask any friends or family members if they are willing to invest in your company or loan you a lump sum. A loan might be easier to set up as all you need to do is agree to repay it over a set term, with interest added on top. Interest rates can be significantly lower than if you borrowed from a bank or another lender, and it can be a quicker process too.
Alternatively, if you go down the investment route, your friends or family would hold a stake in your company. This means you wouldn’t need to repay them anything as your investors would only get money if your company becomes profitable. On the flipside, if your business is not successful, your investors could lose money.
Whichever option you choose, it’s crucial to draw up an official written agreement so that there are no misunderstandings. If you go for the investment option, it’s important to highlight the risks, while if you’re borrowing through a loan, you need to state what happens if you can’t make your repayments.
Private investors are individuals who are willing to invest their own money into your business. In return they usually receive shares in the company and can have a say in how its run.
There are two main types of private investors – angel investors and venture capitalists.
Angel investors, or business angels, are high net worth individuals who have the money to invest into a business. They usually prefer to invest in startups and early stage businesses. However, they will need to be confident of your business’ success, so you will need to have a solid business plan and be able to show that your business has high growth potential.
Angel investors are usually experienced entrepreneurs which means that as well as offering funding, they can also offer their own skills, expertise and contacts which can be invaluable to a new business.
Venture capitalists, on the other hand, don’t invest their own money, but that of investors. They do this by setting up a fund that is used for others to buy shares in the company. Although they can help startups, they usually invest in businesses that are already established and are looking to expand or launch a new product or service.
Venture capitalists usually invest larger sums compared to angel investors – a few million in some cases. The return on investment is typically much higher too.
If you know people in a similar line of business to yours, it can be worth contacting them to see if they know of anyone who might be interested in investing in your company.
Be aware, however, that this can be quite a drawn out process, as you might need to contact several people or even attend industry-related events to network and expand your pool of potential investors.
Another option is to look at schools offering diplomas or degrees in your area of work. Some of the professors who teach there might be willing to put you in touch with some of the guests they invite to speak on certain subjects. If they can set up an introduction for you, this could be another opportunity for investment.
Crowdfunding is another potential option to explore. It enables businesses to collect money from a number of people (‘the crowd’) via online platforms. There are several different types of crowdfunding platforms, as outlined below:
With this type of crowdfunding, investors are asked for relatively small sums of money and in return, they receive a reward. This is often a product or service offered by the business. For example, if your business makes clothing, everyone who invests a certain amount might receive a branded T-shirt. Rewards could also include exclusive invitations to events.
In this case, any money given is not expected back. Donations are usually for relatively small amounts and the money generated is usually for a project. For example, it might be to give to families who have experienced a loss or a community that needs medical support.
GoFundMe is an example of a donation-based crowdfunding platform, where the family of a person diagnosed with cancer, for example, might start a campaign to raise money for specialised treatment.
Debt based crowdfunding is also known as peer-to-peer lending. Here, you receive money in the form of a loan from a large number of private investors, which could be individuals or businesses.
Peer-to-peer lending matches those with money to lend with those who want to borrow. Because it removes the need for financial institutions such as banks, interest rates tend to be better for borrowers, while investors generally earn a higher return than they would through a regular savings account.
With equity crowdfunding, investors usually receive shares in the company in return for their investment. This means they receive a share of the profits if the company performs well. Investment sums tend to be in the thousands but it can be a riskier option as there is no guarantee on return.
Before deciding whether to hand over their money, investors will consider a number of factors. These include looking at whether your business offers an innovative or unique idea or product that will sell well. Investors will also look at your business plan, as well as financial data such as your profit to date, expenses and financial projections. They will also want to know how easily they will be able to get their money out of the business when the time is right.
Perhaps one of the most important ways to appeal to investors is to have a solid business plan. You need to be able to show that your business can grow fast and increase in value. It’s important to be as thorough and as detailed as possible. You also need to have a clear idea of your business and where it’s going and be able to talk about it when asked.
Make sure you take the time to prepare the necessary documents and send these to potential investors well in advance of any meetings so that they can review them.
Another tip is that if you have an online presence, check that your website is up to scratch and any social media you use works in your favour.
Written by
Rachel has been writing about finance and consumer affairs for over a decade, helping people to get to grips with their finances and cut through the jargon. She's written for a range of websites and national newspapers including MoneySuperMarket, Money to the Masses, Forbes UK, and Mail on Sunday. Rachel has covered almost every financial topic, from car insurance and credit cards, to business bank accounts and mortgages.
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