PRIVATE INVESTORS FOR YOUR BUSINESS – WHAT YOU NEED TO KNOW.

Cash flow is the lifeline of every business, and for entrepreneurs, one of the first things you need to know is how to generate cash flow with your ideas. One of the quickest ways to increase cash flow, especially when your business hasn’t gained traction yet, is by going to private investors. As a startup founder with little to no experience, securing funding can be daunting. Let’s look at private investors and discuss where to find them.

WHO ARE PRIVATE INVESTORS?

A private investor is a person or business that gives money to help startups or businesses grow. People look for private investors because they have several advantages over traditional funding methods. Private investors are often split into groups depending on the type of business and industry, making it easy to find an investor to invest in startups for your specific industry.

Unlike traditional forms of investments such as money from the bank, private investors can help you in more ways than giving you money. For example, investments can be made through equity or debt. Equity is when you give the investor part ownership of your company for their money. Investors get their money back based on their stake in your company or the number of shares they own. Debt investment refers to an investor lending money to a company with the expectation that the borrower will pay back the investment with interest.

Most banks are risk-averse, and since startups are risky businesses just getting started, it is usually hard to get a loan. This is the main essence of private investors; when a bank turns you down, you can pitch to private investors for money. These private investors are individuals and companies that are certainly not banks. They are accomplished individuals who give their money to new businesses in exchange for ownership of the business or as a debt investment to be paid with interest later.

WHAT ARE THE DIFFERENT TYPES OF PRIVATE INVESTORS

Friends and Family

It may be hard to believe, but this should always be the first group to turn to when raising your business funding. Family and friends can be a great source of investment because those close to you already have the trust and confidence in you (especially if they have followed your entrepreneurial journey) to take the risk of investing in your startup. Family and friends can either lend money to your new business or make an equity investment. Many great companies have started this way – even Jeff Bezos got an initial startup for Amazon from his parent's savings!

Remember, people have worked hard for their money, so it’s best not to take any agreements lightly just because they are your family or friends. Treat their investment with respect, and do not take any shortcuts when completing a due diligence process with them to show that your business idea is a sound investment.

Angel Investors

Certain wealthy individuals, known as angel investors, are willing to invest their money into new businesses during the startup phase. Individuals such as these have invested professionally for a long time and sometimes place their money by joining forces with other angel investors. This is called an angel group and can bring a more significant amount of money to a startup.

Angel investors are required to be credited by local authorities and regulators. For example, the Securities and Exchange Commission in the USA advises that accredited investors should have a net worth of at least USD 1 million. An added benefit to using an angel investor is that they can mentor you with their professional experience, which has untold benefits for your business.

Private Equity Investors

Private equity is money put in by private individuals and private equity firms. Private equity investors get a piece of your business or a debt note in exchange for their money. The goal of a private equity investor is to make money by selling their shares at a profit after a few years. Private equity firms are investment firms that take money from individual investors and pool it to invest in companies with potential.

There are four main benefits of working with private equity investors:

Investment Terms

The most significant benefit of getting money from private investors like family and friends is that the foundation of trust is already built. When trust already exists, it is easier to get a meeting with the investors, and most importantly, they are more likely to agree to more flexible terms for the investment.

Credit History

Since private money financing doesn’t have the exact requirements of a traditional bank, it doesn’t require an excellent credit score or even landed collateral as traditional banks would demand. This saves you a lot of time and stress you would face meeting all the obligations of a conventional bank loan.

Appetite for Risk

Having been entrepreneurs themselves, such private investors are often more willing to take considerable risks than a bank.

Access to Knowledge

Private investors are knowledgeable people with much experience. In addition to giving money, they also offer advice and mentorship sessions to founders. There is nothing better than having direct access to high-level experts who can guide you.

Securing Your Private Investor

After reading through the types of investors above, it is time to explore your personal and business network for potential investor connections. But before you make that call, here are some tips to help you secure funding:

· Time is money. Always make sure you prepare to have a meaningful conversation about investing in your business. Don’t waste an investor’s time or your limited opportunities to show a potential investor why your business idea is good.

· Be business ready. Can you show that you have what it takes to turn your idea into a working, financially viable business and that you have already researched the market, the location, the suppliers, and the pricing? Be clear about your product or service and its competitive advantage. How does it solve problems, and who will be willing to pay you?

· Know your numbers. Too often, start-up entrepreneurs pitch massive numbers, assuming their business idea will be an outstanding success. If you want to impress a private investor, be realistic in your financial projections, and show in your business plan what kind of money you expect to make, over what period, and when you will be able to pay back the investment.

· Present a solid money plan. This is where you show your investor how much money you need and how you will use it. Your money plan needs a practical analysis of your burn rate (how much you will spend to make money).

· Show the return options. Every investor will want to see a return on the money they invest with you. Prepare a few scenarios, including best- and worst-case financial returns and short- and long-term strategies for growing the investment money. Be willing to talk about an investor’s future exit right from the start so that they know you are confident about giving them a return.

If you’re hoping to learn more and seek funding in the future, this article should help you in the beginning stages. However, for more detailed guidance, you can send me an email tj@yourscribe.co or info@yourscribe.co