Adequate financing can mean the difference between survival and an untimely demise for any business. And with banks still holding on to their assets, finding that capital can be a little harder. But if you’ve found a potentially viable source of backing, how do you know it’s right for your business and long term goals? Many business owners are at least familiar with some of the more common methods of financing-—angel and venture capital–as well as not so common methods, such as factoring, but how do you figure out which method of financing is best for you? Check out these tips from Darrin Redus Sr., chief economic inclusion officer for JumpStart Inc., a Cleveland-based venture development organization.
FACTORING: Factoring companies provide immediate working capital by assuming the risk of collecting on a firm’s accounts receivable. This, however, is a risky method, since the fee charged is usually between 10% and 15% (which exceeds interest rates on a regular bank loan). “But you’re getting cash instead of waiting to get paid,†say Redus.
What you need to ask yourself:
Are you a viable candidate? According to Redus, factoring companies rely on the strength of reputation. If you have A-list clients, factoring companies will be more likely to assume the risk of lending to you and collecting on your accounts receivable since those companies are more likely to pay their bills in a timely manner.
ANGEL CAPITAL: Angel funding is capital provided by high net worth individuals who are typically looking to support higher growth companies. These individuals are also looking to hold an equity stake within your company. The typical angel investment ranges from $25,000-$250,000, says Redus, but can reach upwards of $1 million. With this type of equity in your company, an angel investor wants be assured that he/she will see a return on his/her investment.
What you need to ask yourself:
Are you ready to give up some control? Angel investors usually seek 5%-25% equity in a company they invest in, but it can be higher, says Redus.
Does your business address a large market? Your industry’s market potential should be at least 500 million, says Redus. If you can show that you have an innovative idea that can corner 1%-2% of that large market, it will be easier to win over an angel investor.
How’s your management team? Investors need to know that there is a succession plan in place in case something happens to you, and they need to have a sense of who is likely to join your team. “What gets investors very excited is the folks looking to add to your management team should you get the investment,†says Redus.
VENTURE CAPITAL: Somewhat similar to angel investing but venture capital comes from institutional investors. According to Redus, in most cases, the minimum investment is no lower than $1 million and runs upward of $10 million.
What you need to ask yourself:
Does your business address a large market? Where venture capital is concerned, the market size should likely be at least 1 billion. It’s imperative to convince investors that you can corner at least 1%-2% of this market.
What’s your competitive advantage? In addition to market size, investors look for differentiation. What makes your business so unique in terms of a patent, difficulty of duplication, or exclusivity?
What’s your growth potential? Your business should have at least $30 to $50 million in growth potential, again, for a significant risk. Investors are expecting a significant return.
RESOURCES
SBA
Angel Capital Association
The National Venture Capital Association
The Marathon Club