The use of outside capital has been a staple for small and mid-sized businesses since the beginning of time. And, if we’re being honest with ourselves, it is not usually the primary source of financing that most need to worry about. The primary sources of financing (debt or equity) will be either internal or external. However, there are some pitfalls associated with the use of outside capital that should be highlighted before you jump into financing.
Standardized procedures for lending and receiving money make it. Inherently risky to approach an individual angel investor for a loan. Compared with the use of an institution like a bank or credit union.
A critical element of successful fundraising is aligning yourself with your audience and crafting your story so that you appeal to their. Interests without giving them anything they can misconstrue as selling out. Keeping this in mind, don’t raise money from someone. Who doesn’t understand your business or venture – or you might find yourself stuck on square one.
If you do go about fundraising through an individual angel investor, keep these pointers in mind:
Prepare your story.
Know your audience.
Make it worth their while.
With that being said, there are some solid reasons to use outside financing. On a very limited basis for new businesses or products/services you wish to test on the market. An example would be using angel investors as opposed to debt financing on product/service launches. So you can see how customers respond to it without having to repay a creditor with interest. While this is not the traditional use of outside capital. It can be a helpful tool for learning about your market and gauging consumer response before going into debt. External financing will still have its disadvantages. But using it in a targeted fashion might save you money and headaches in the long run.
If you are looking for outside financing. Do your diligence before approaching someone with your offer. Due diligence is always recommended at all stages of business. But it becomes an imperative step if you are using outside capital. Make sure you know why they are interested in what you have to offer and their expertise. In not only the industry your business is in but also whatever you are selling. Angel investors can have very specific interests. So make yourself aware of their potential concerns and address. Them to give yourself a better shot at being successful.
Borrowing money from an angel investor should always be viewed as a last resort. If it’s not – then you probably should turn around and head back the other way. Angel investors should not be your first choice for financing for several reasons. But their expertise in an industry can’t always be matched by a bank or credit union. Think long and hard about if one angel investor is worth losing out on a more. Traditional loan from a bank or having a more workable debt repayment plan from a creditor.
External financing should be usedsparingly and with the utmost prudence. The last thing you want to do is give up equity in your business if you don’t have to, so take baby steps if necessary. If angel investors are not where you want or need to be, then move on to banks or credit unions. Approach them with the same strategy you used when approaching angel investors. But don’t be discouraged if it takes a little more time and effort – your future business will thank you for it.
External financing should only be pursued as an absolute last resort. Why?
It has significant disadvantages compared to other kinds of financing. Because of the equity you have to give up and the lack of negotiating power. If you absolutely need outside capital and there is no way around it. Make sure you do your due diligence and know exactly. What it is that they want from your business before signing on the dotted line.
Remember that most angel investors will be very hands-on with their investments. And it will be difficult to avoid giving up equity. However, because of the lack of negotiating public power businesses. Have with angel investors and the lack of outside. Financing options for public businesses. This is where many business owners turn.
The important thing to remember is that no matter what type of financing you choose. You still need a way to repay your creditors. Amassing debt without a clear repayment plan is not only an oversight. But it can be crippling to your business’s long-term success. So while outside financing offers its own set of advantages. Just make sure you know what you are getting into before taking the plunge.