Small Business Financing: VC’s and Banks
Looking for money to start or support your small business?
Avoid one of the biggest, and most common, mistakes — don’t ask
the right people for the wrong kind of financing.
There are several categories of small-business funders, including
small-scale venture capitalists, “angels,” banks, factors, and
“irrational investors.” It is very important to present potential
funders the right kind of proposals. Don’t make a pitch for venture
capital from a bank, for example, and don’t ask a factor for the
kind of generous terms that an irrational investor will offer.
Here is what you need to know about venture capitalists who work
with small businesses, and banks. Each category of lender looks for
very different kinds of proposals from businesses, and each expects
a very different kind of payoff:
- Small-scale venture capitalists are likely to back your business
because they believe in you personally, and in the business
opportunity you have identified. They are motivated by the
personal track records of the principals in your business, and by
the timeliness of your business concept. If you haven’t led a
business before, don’t expect help from a venture capitalist.
Expect venture capitalists to seek a substantial amount of the
equity in your company in exchange for their backing, and expect
them to demand a great deal of accountability for how you spend
their money. Venture capitalists generally expect their
investments to pay out when your company goes public, or
undertakes a future round of financing.
- Banks tend to back small businesses in order to help them
rationalize cash-flow. To justify loans to small businesses, banks
like to see a track-record of profitable operation of your
business, and assets that can secure your loan. In most cases,
you’ll need outstanding receivables or business property with
clear equity value to secure a bank loan. However, many banks
today have more adventurous lending programs for small businesses,
and the criteria for lending are often quite flexible. Expect to
be asked to guarantee any bank small business loan personally.
Banks almost always expect their return in the form of loan
repayment, and do not take any equity stakes in small businesses.
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