Pros and Cons of Getting Personal Investors for Your Small BusinessWritten by Angela on May 24, 2021
Building a profitable business is a lot of work, but oftentimes, it’s not just about the amount of effort you put in. Starting and expanding your small business requires some capital as well.
Oftentimes, financing your new business means using up some hard-earned savings or taking out a bank loan. But those aren’t the only options. One of the possible ways to build up capital is to get help from personal investors.
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One of the biggest decisions you can make is whether you should get personal investors for your small business. This decision isn’t made lightly, and it’s important to know all your options before making this big decision.
In this article, we’re going to go through some reasons why you might want personal investors. We’ll also share some reasons why you might want to stay away from them. There are also a few tips we can give that will help any small businesses considering getting an investor figure out if it’s right for them!
The Pros of Getting Personal Investors for Your Small Business
Personal investors can be a great way to grow your small business, or even help you start it from the beginning. Aside from using up your personal savings or taking a bank loan, this is a great way to gain some capital.
But additional capital is not the only advantage of getting help from a personal investor.
Pro: Get Valuable Advice
One of the best advantages to getting a personal investor over a bank loan or doing it all on your own is gaining valuable advice from a veteran.
The right investors have experience with running their own businesses and might know where you’re going wrong or what’s missing in the industry that could help you succeed.
This advice is priceless for any small business owner, whether to help them avoid future issues or help in overcoming obstacles.
Pro: Get Investment Money You Might Not Otherwise Have Access To
Sometimes banks might refuse to lend money because of your credit score or other factors. There are a few innovative ways of getting additional capital, but getting personal investors could be the way to go.
It’s a great option for those who are looking at starting their own business and need funding to get started without having an established credit score that would make it easier with banks.
Maybe your small business plan is thoroughly laid out and you’re not in need of business advice. But personal investors can provide the funding needed to get your idea off the ground and keep it running.
Pro: Avoid High Interest Rates on Loans
Bank loans are an important method in obtaining capital for business or any endeavor. However, you’ll be faced with high interest rates on a loan that may be hard to pay back. After all, you’ll be spending most of it on starting or expanding your small business.
With personal investors, you can avoid this issue as they typically earn money on their investment when your business starts to earn money as well. This way, you can focus on what’s important: making a profit, rather than making the bill.
The Cons of Getting Personal Investors for Your Small Business
Personal investors sound like a match made in heaven for small businesses. With them, you can focus on your business without worrying about loan payments and interest rates, or if your personal savings are getting depleted.
However, there are still some things you should know when taking on personal investors for your business.
Con: They May Want You to Change Your Vision
Personal investors are often looking out for their own interests. It’s their money, after all! They may want you and your company to change the way you do business. You’ll be hard-pressed to refuse when they’re the ones who are funding your business.
Maybe they think that what you’re doing is not sustainable in this day and age, or just too much work for such a small return on investment. Whatever their reasons, you’ll have to navigate this as a business owner.
Con: They Might Want to Have a Lot of Control
It sounds great when personal investors want you to succeed. But they might take this too far by wanting greater control over your business than what you are prepared to give them.
This isn’t necessarily a bad thing. You can get a lot of valuable advice and on-site help this way from an experienced business owner.
However, this can be a problem if they don’t have an understanding of some details of your business, industry, or day-to-day activities.
Con: They May Influence Your Decision Making Negatively
Personal investors who invest in your business may want you to take on their personal agenda. They might not care about the success of the company, but rather what they personally feel is best for it.
This may be at odds with your own knowledge of your business and industry. Or you may not even be aware about their lack of knowledge when you come to them for advice. Ordinarily, you might make your own study to determine the best course of action. But with an investor guiding you, you might end up depending on their opinions even if it’s not the best course of action.
This may lead to poor quality decisions or bad management processes.
These are some of the biggest challenges and concerns when it comes to getting personal investors. While they can be very beneficial for your business, it’s important to be aware of these challenges, so you can address them right at the start.
There are ways for you to minimize the risk of taking on a personal investor who isn’t a match for your small business. It starts at the very beginning, even before asking someone if they can invest in your business.
Five Things You Need to Know Before Asking Someone For Money
The benefits of having a personal investor can outweigh the challenges you’ll need to manage. But to do this, you’ll have to pick the right investors and go about it correctly.
There are some things you’ll need to know and prepare when it comes to taking on personal investors.
#1: Be Clear About What You’re Asking For
This is the most important question you need to answer before asking someone if they are willing to invest in your business. What does your small business really need?
But this is not just about giving a set amount to receive as a lump sum or in funding over a few months. It’s about the monetary needs of your business as well as any other support you will need.
Before you approach a possible investor, make sure you have your business plan ready. It has to answer exactly what kind of support you need from an investor, and how their support will help you make a profit.
A solid plan can help with the investor’s decision, but there are more reasons to have it ready. It can also mean fewer misunderstandings along the way if they choose to invest in your business.
#2: Look Into Their Previous Experience
Research their experience beforehand and see how well they match up with what you want for your business. Did they work in the same industry, or an adjacent one? Do they have businesses under their belt whose trajectory matches what you want your own business to follow?
Their experience can tell you not only what kind of advice they are qualified to give, but also how they ran their company, what they might expect from you, and what you are prepared to give them in exchange for their funding.
#3: Find Out Their Current Business Activities
You should be aware of what they are currently doing in business to determine if they’re a good fit for your business, too.
Are they still running a few businesses? This might mean they might be less interested in an active investor role in another venture. Is that what you want? Is having their expertise easily available to your business’ day-to-day activities important to you?
If they have a business in the same industry you are in, will there be competition issues? Perhaps you’re running a more niche business that won’t directly compete with theirs. You may later on be absorbed into their core business. Is this an acceptable outcome?
If they have a business in an adjacent industry, is there some way to partner with them? Perhaps both your businesses can mutually benefit from the other.
Be mindful that involving your businesses more closely can also bring about more challenges. For example, maybe you’re supplying a business of theirs with some materials. What happens if you need to prioritize another client’s order over theirs?
#4: Determine What Role Each Takes On in Your Business
Make sure it’s clear between you what the roles of each are, and how to resolve decisions when there’s something in contention. What happens if one person wants to take a different approach? What is the procedure for making decisions when there’s disagreement about what would be best, or how things should happen?
Some of these issues will resolve themselves over time as you get more familiar with each other. But it’s better to know up front and establish protocols than have any disagreements further down the line while the business is underway.
#5: Outline What Happens if One Person is No Longer Interested
The more personal the investor, the higher chance that this may happen. There are a few main things to consider in the event of an exit: how do you want them to be able to extract their investment?
Make sure the exit plans also include the possibility of handing other perks they may negotiate for themselves, such as equity in the business, or a say in the future direction of the company.
The larger your business becomes, and the more personal investment there is, it’s worth considering what would happen if one person was no longer interested.
The decision to take on a personal investor is one of the biggest decisions your small business will make. There are pros and cons for this, as with any major decision in life. Is taking on a personal investor the answer, or should you look at other funding sources for your business?
You want to weigh all options before you commit to an action that could have huge consequences further down the line.
However, if you find a personal investor who’s a perfect match for your company, the benefits can be significant. You can start or grow your business in amazing ways.