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An important part of starting a small business involves financing. You need capital to purchase (or rent) property, buy inventory, hire staff, and market your product.But many startups don’t always have that kind of cash on hand. That means they may have just two primary options when they need funding: take out a business loan or find an investor.Bringing one or more investors on board has many potential benefits, which we’ll discuss shortly. We’ll also look at how to find an investor that will help your business grow.Pros and Cons of Investors
While there are plenty of reasons to consider bringing on an investor, there are also a few drawbacks to be aware of.| Pros | Cons |
|---|
| Gets you the cash your business needs | Investors will own a share of your company |
| Doesn’t need to be repaid like a loan | They may want to help make decisions |
Pros of an Investor
The primary advantage of working with investors is that they can bring you the capital your business needs to grow. Having that cash can open the door to new opportunities for your business.You also don’t typically repay the funds with interest, as you would with a loan. Instead, you’ll return the investment to the investor in proportion to the amount of equity they own. The idea is that the investor’s initial investment will make your business worth more — for everyone!Many investors specialize in a given industry, so working with one could create great opportunities for you to connect with more potential business partners and clients.Cons of an Investor
The drawback for some startup founders is the fact that investors take a piece of your company in exchange for the capital they invest. Let’s say your business is worth $1 million and an investor gives you $100,000. He now owns a 10% stake in your company. You might prefer to be the only owner so you can retain complete control.Some investors may want a say in the decisions you make for your business since they have a vested interest in its success. You might not want other people weighing in on your company’s operations.And, given their stake in your company, investors may put pressure on you to hit certain milestones for your company, such as reaching profitability or bringing a certain amount in revenue. You may not want that kind of pressure.Before you learn how to find investors for a business, let’s examine what you can expect an investor to ask for in regards to the percentage of equity of your company.What Is a Fair Percentage for an Investor?
Part of making your business an appealing one to investors includes evaluating how much equity you are willing to offer. Offer too little and investors may not feel it’s worth their time; offer too much and you cut into your own profitability.There’s no single number for what’s considered a fair percentage for investors. However, on average, a fair percentage for an investor is 10-25%. Keep in mind that if you have multiple investors, you’ll dilute your company’s value with each investment.4 Tips for Attracting Investors
If you’re hoping to secure an investor for your small business, it’s important to start early so you can build the type of business that investor’s want to be a part of. Below are four tips for attracting investors to your small business.1. Know Your Company’s Valuation
Because investors take a percentage of equity of your business’ value, you need to start by knowing what that value is. You can go with a simple calculation by subtracting liabilities from assets, though there are more complex ways to calculate it. You’ll also want to understand the cost of capital to make sure that an investor is the right financing solution for you.2. Get Your Finances in Order
If you rarely update your accounting software, that needs to change when you’re looking for how to find an investor. Your software should sync with your business bank accounts, and you should review it to ensure that your business’s expenses are appropriately categorized and there are no discrepancies.3. Toot Your Own Horn
Most business owners don’t find it easy to talk about their business wins. Nonetheless, that’s what you’ve got to do to make sure your company’s successes are well-broadcasted in local newspapers and your company’s website. That way, when investors start researching you, there’s great news for them to read about.4. Perfect Your Pitch (Deck)
When you approach investors, you’ll want to have a pitch deck — essentially a PowerPoint presentation — that outlines what your business does and why it’s a lucrative investment for investors. Remember to focus on what’s in it for them, not for you.Types of Investors
Just as there are many options for funding a startup, there are also several types of investors.You can work with venture capitalists, who typically work for an investment firm and specialize in one or more industries. There are angel investors, who are often private investors with experience in a given field.There is also crowdfunding for a small business. With crowdfunding, anyone can donate money to your crowdfunding campaign. Some types of crowdfunding offer equity, while others are donation-based or reward-based, meaning you provide some sort of thank you gift to people who donate.Recommended: Angel Investors and Venture Capitalists, Compared3 Ways of Finding Investors
When it comes to finding investors, here are a few places to start your search:- Your business network
- Friends and family
- Private investors
1. Your Business Network
You likely already have a network of business partners, clients, and industry contacts, so why not ask if any can refer you to a potential investor? You might even find an opportunity to partner with someone else who works in the same space.2. Friends and Family
Your friends and family have watched you build your business. They might want a piece of its success, so open your search for an investor up to them. Just be aware that it can be tricky to mix business and personal ties, so have strict parameters and contracts if you take on an investor you’re close to.3. Private Investors
As discussed earlier, venture capitalists and angel investors might be a good option. You can connect with them through industry events and organizations — or even a simple online search.Recommended: Venture Capital vs. Private Equity: What’s the Difference?Small Business Funding With Loans
Bringing on an investor can be a boon for your company’s growth. If you can’t find an investor for your business, you might consider other financing solutions, such as a small business loan. At Lantern by SoFi, we offer small business loan comparisons so you can see, at a glance, multiple options in our lending network that you can qualify for.The Takeaway
Taking on investors can be a great way for a small business to raise capital, particularly in its early stages. But it’s smart to know all your options for raising funds, both from investors and from other sources. That way, you can figure out what makes the most sense for your company. If you’re looking for a small business loan, consider Lantern by SoFi. With just a single application, you can receive a small business loan offer from one of our top lenders, all with no obligation to you.
Photo credit: iStock/erdikocak
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About the Author
Susan Guillory
Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards. 
