Investors are unique players in the growth process of a business. The level and quality of their involvement can ultimately help determine a company’s success or failure. It is imperative for budding entrepreneurs to take the time to learn about the types of investors available and how to use best practices when approaching them for funds.
Investors can be called upon during almost any stage in the life of a startup. Below are five of the most common types of investors, as well as recommendations for when they should be considered.
Banks are a classic source for business loans, Inc. explains. Loan-seekers will usually be required to produce proof of collateral or a revenue stream before their loan application is approved. Because of this, banks are often a better option for more established businesses.
Angel investors are individuals with an earned income that exceeds $200,000 or who have a net worth of more than $1 million. They are found across all industries and are useful for entrepreneurs who are beyond the seed stages of financing but are not yet ready to seek out venture capital.
Peer-to-peer lenders are individuals or groups that offer funding to small business owners, Time reports. To work with these investors, entrepreneurs must apply with companies that specialize in peer-to-peer lending, such as Prosper or Lending Club. Once their application is approved, lenders can then determine the businesses they wish to support.
Venture capitalists are used only after a business begins to show a significant amount of revenue. These investors are notable, as they usually invest a substantial amount of money (often around $10 million). They gain most of their returns through “carried interest,” or a percentage received as compensation from the profits of a hedge fund or private equity.
Business owners often rely on family, friends or close acquaintances to invest in their companies, particularly in the beginning. However, there is a limit to how many of these individuals can invest in startups because of legal limitations, Legal Zoom explains. While it may be easy to convince loved ones to help, thorough documentation is highly recommended.