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Types of Funding & Investors

Business funding is a big issue for small businesses especially during challenging economic times. It’s also important to keep in mind that there is quite a bit of overlap between venture capital and private investment. Therefore, it’s really important to understand where the funding is coming from, how it’s being used and when is the best time to tap into that funding.

In order for a business to raise capital from a reliable source, it will have to submit a prospectus to potential investors and/or banks. The prospectus should be well organized and well presented. When working with angel investors or private investors, make sure that you have prepared a presentation as well. Having a well presented business financing prospectus can help ensure that you are able to get investor meetings and pitch your business to potential lenders.

Capital that is raised from private investors is often referred to as Seed Capital or Series A Capital. Seed Capital is provided by individual entrepreneurs and/or groups of individuals and is typically required to seed a business before it goes public. Capital from venture capitalists can be used for a variety of purposes such as expand a business, make an initial investment, purchase office equipment or sign major contracts.

Private investors & banks are one of the most common sources of funding for businesses. Capital from these sources can also be used for a variety of reasons. Many private investors are able to provide capital quickly, which can be extremely helpful for growing companies. They are also able to offer a more personal connection to your business as they are not associated with a financial institution, which can be intimidating for some business owners. The final type of funding comes from institutional investors such as hedge funds, institutional investment groups or pension funds. These investors are able to offer long-term funding to help a company finance operations and grow.

The funding and investment terms you are working with will depend on the type of capital that you choose. Small business loans are generally interest-free and do not require any collateral. Hedge funds and other investment groups offer funding terms that can range from one year to 30 years. Capital from wealthy individual investors is not as common, but is possible and often used when a company is in distress. The terms for this type of funding vary greatly and will be specific to the investors.

Funding & investment options for businesses come in many forms and can be confusing. It can be helpful to speak to a financial adviser or business lawyer who can assist you in understanding the options available and what they mean for your business. Before you approach investors, be sure to fully understand the terms of the financing you are seeking. Working with an adviser or lawyer can also help you to avoid potential pitfalls such as misrepresentation of the business, a desire for a high return on investment that is not realistic, or the inability to repay the capital. Once you understand the process of obtaining capital, you can then focus on developing the business.