When entrepreneurs begin their journey, one of the first issues they encounter is deciding how to obtain funding for their startup. Often, they seek loans from banks, work with government agencies such as the US Small Business Administration, or choose to use their personal funds. But while these are all valid courses of action, they simply do not compare to the value that investors offer. Virtually any major business you can think of is backed by investors, and it’s no surprise, as investors can play a vital role in the expansion and success of a company.
How? An experienced investor will not only provide money. They also bring guidance, decreasing the risk of failure for your startup and providing valuable insight into your business processes. As a bonus, the process of garnering capital from investors can be much more straightforward than obtaining a traditional loan.
If you’re a solopreneur or small business owner, it’s well worth your time to consider courting investors to your cause. Here are a few different types of investors you may encounter, and the unique benefits they can offer your endeavor.
What Are Investors?
Investors differ from traditional lenders because they conduct business based on the principles of equity financing. In the simplest terms, equity financing occurs when a company sells shares in order to raise capital. When an investor purchases shares of the company, they also obtain ownership rights to the company. Equity financing may refer to the sale of preferred shares, common stock, or share warrants. Investors accrue financial gains when they receive dividends or when the price of their shares increases.
There are several different types of investors, including the following:
- Angel Investors are wealthy individuals who offer to back promising startups that they believe can generate substantial returns. Angel investors provide their knowledge of business and social connections. It is important to note that angel investors are typically more passive than venture capital firms, and often do not supply the same level of financial backing.
- Crowdfunding Platforms allow the public to invest in a company in small amounts. People choose to invest in companies because they have faith in a founder’s business model. Investors hope to receive a return on their investment in the future. However, obtaining adequate capital through crowdfunding investments requires strategic marketing techniques to attract public interest.
- Venture Capital Firms are an allied group of investors who invest in businesses they believe have the potential for rapid growth. They generally invest a more significant amount of finances into a startup than angel investors. Venture capital firms are also more active than angel investors and conduct higher due diligence.
- Corporate Investors are large companies that invest in private companies. Essentially, they provide businesses with necessary funds and establish a partnership with the companies they are investing in.
There are various investment routes you can choose to pursue for your small business. But across the board, there are three major reasons that your startup needs investors instead of a loan.
1. Investors Decrease Risk in Comparison to a Loan
Studies from the Harvard Business School have shown that startups supported by investors stay in business longer, experience more growth, and have a higher return on investment. Unlike traditional lenders, investors are committed to ensuring that your business succeeds. An investor’s primary goal is accruing the maximum profit possible in the shortest amount of time. They are willing to apply their knowledge of business processes and bring your dreams to life.
Traditional lenders, on the other hand, have no stake in ensuring the long-term viability of your startup. Once you obtain a business loan, traditional lenders are only concerned that you are able to repay the loan in accordance with its terms. As such, investors can be a much more active resource, helping mitigate the inherent risks that come with running a startup. Often, if something goes wrong, investors have the motivation and ability to assist where other lenders cannot.
2. Investors Have Valuable Insights and Experience
Raising capital for your startup entails much more than financial resources. Many investors began their own careers as entrepreneurs, meaning they are privy to years of first-hand experience and relevant knowledge. At the beginning of your journey as a business owner, investors can empower rapid growth in your network, enabling you to access resources such as legal and tax services or research that would be otherwise challenging to obtain with limited experience.
Forming a relationship with investors also provides introductions that can convert into customers, employees, and additional investors to expand your startup. For example, some investors have the social capital and network to help you hire the most qualified staff available, setting your business up to scale quickly.
Furthermore, investors can use their knowledge to improve your overall business processes. Since investors are typically experienced entrepreneurs themselves, they can assist you in the development of marketing strategies, business planning, and crisis management. If a disaster occurs, investors will be capable of providing advice so your startup does not fail. Global catastrophes and economic downturns are inevitable, but investors can assist you in handling unforeseen issues effectively.
3. Obtaining a Loan Is Challenging
Unlike venture capitalist financing, business loans can be challenging to obtain from banks, and many startups can barely meet the minimum requirements. The first obstacle arises in the form of credit history requirements. In order to qualify for a business loan, you’ll need an established business credit history and a healthy personal credit score. Lenders also take into account the amount of time that you have been in business. Of course, this can pose a huge issue for startups. Furthermore, most startups have limited annual revenue, which decreases the likelihood that lenders will trust them to pay the loan back.
In contrast, investors offer a much larger infusion of cash. To acquire capital for your startup from investors, you will need to convince them that your startup has the potential to be profitable for them. Unlike a business loan, you are not required to pay back the capital you acquire from investors. Investors are taking a risk by investing in your startup, so if your business fails, it is considered a poor financial decision on their part.
Getting Started with Fahad Alrajhi Group
It is clear that the benefits of working with investors to fund your startup are much greater than that of traditional lenders. Investors place emphasis on the growth and expansion of your business, without the stipulations that loans require. Is your business prepared to expand? If you’re seeking venture capital, consider contacting Fahad Alrajhi Group.
Fahad Alrajhi Group seeks to endorse a culture of entrepreneurship and invest in business ideas that radically impact society while diversifying regional economies. If you have an exciting business in alignment with our values, contact us today to find out how we can help make your vision a reality.