Running a small business requires a constant and considerable flow of capital; and getting a small business idea off the ground requires just as much (if not more). While there are several kinds of financing geared toward sustaining and expanding small businesses, another option to consider when looking for capital is taking on private investors. Private investors can come in many forms but most frequently operate as venture capital firms or seed funds, also known as angel funds. But not all private funding falls into those two categories. In truth, private funding encompasses all non-bank and non-financing routes for getting capital into your business from a third party. Today, we are specifically addressing the potential pros and cons of accepting investments from private persons into an existing business.

Pro: Let Your Business (Not Your Credit) Speak for Itself

Convincing a private investor to support your business is a completely different process than if you were to seek funding at a bank or online financing company. While banks and all secured financial institutions blanketly require seeing your credit score, and frequently your entire financial history, private investors are often interested in different elements of your business. Specifically, private investors want to be certain their money will make them (and you) more money and that you, the business owner, are a reliable mast with which they can knot their sail.

Working with investors gives you the freedom to sell yourself and your business on the merits which truly excite you; the best investors will match your excitement and see that as a reason to trust your business. Private investors are a great source of capital, then, for newer businesses with a shorter credit history or businesses that can meaningly convey their plans to expand and make investors’ money expand as well; banks and financial institutions don’t get excited for your business’s growth in the same way an investor might.

Con: Investors Expect Influence in Your Business

A private investor, especially one making a major contribution, can want a decision-making seat at the table of your business. This is something all publicly traded companies deal with regularly; but in the case of small businesses the investor and business owner relationship can play out in many ways. At the very least, investors will anticipate that their input and ideas will be genuinely considered and that they will have a legitimate outlet to voice them.

As a small business transfers into the space of equity and investment, it can feel unnatural to become beholden to investors after having truly been your own boss, as many small business owners will attest that the freedom of making your business’s decisions is one of the high points of running your own operation. Taking on investors is both a structural and emotional changing for a business and a business owner

Pro: Private Investments aren’t Always Paid Back Like a Loan

When a private investor puts money out on your business, they are the one taking in the risk. Very often, an investor’s capital is paid back to them in the same way you would pay back a loan. While there are examples of “investment loans” in which the business owner pays back private investors their principal plus interest, those are much less common compared to equity investments. In cases of equity investments, the business owner exchanges the investor’s capital for a negotiated stake in your company with which they then receive a proportional amount of your company’s profits as you earn them.

Consider as well that if your business fails or is bought out, you can’t default on an investment. That investor’s bet on your business has no protection; as the equity value of your business fluctuates, as does the value of that investor’s initial capital.

Con: Unlikely to Benefit Smaller, Local Businesses

Private investors and venture capital firms are large, capital-heavy forces. Private investors also have an understandable interest in making money. They are most frequently attracted to businesses with a wide reach and near-certain potential to grow in a significant way. If you are, for example, a construction firm servicing the greater New England area with no interest in expansion or going national, it is unlikely you will find private investors lining up at your door. This isn’t because our hypothetical business isn’t successful, it’s because that business’s success and continued revenue doesn’t offer extraordinary growth for investors’ capital. Investors want a bomb primed to blow, or more specifically, a bomb primed to blow their investment sky-high. Private investors prize ambition and potential above all else, and it is essential to understand that not all small businesses are likely the right partner for private investors.

Every small business can’t reinvent the wheel, nor does every small business have massive or international ambitions for expansion. But this borders on common sense; businesses who are actively seeking investors likely already have a firm list of reasons why. Private investors aren’t backing every one-location pizzeria and bodega in America, but those pizzerias and bodega who see bigger, equity-based futures for their business may have a different story.

Pro: Trusted Investors Can Become Valuable Partners

A private investor willing to take equity in your company likely both believes in your mission and has existing industry expertise with which they found your business a suitable partner. Your investors have just as much interest in the success of your business as you do; being that your financial success also means financial success for them.  You and your investors (especially in the small business space) are likely to become close partners in managing big-picture projects. Adding experienced and educated voices to the large decisions in your business can only be a good thing.

What this section and others before it has hinted at is that taking on investors is as much your decision as it is the decision of the investor. Being that your investors will – in a way – represent your business, you have every right to decide who will become your partner through private investment. Being that your small business likely isn’t on the open market, you have the final say as to whose venture capital funding you want to take on. If an investor or team doesn’t seem like the right fit, you have every right to keep looking.

Invest in Your Business. One Way, or Another

Private investors likely aren’t the right match for many true small businesses but in those cases where small businesses see themselves becoming medium-to-large companies in the future, convincing private investors that your plans are feasible may just be the next step in your business journey. No matter if your business is right for private investors or not, the mentality and presentability that attracts investors is attractive and healthy for any and all businesses. Show your ambition and make detailed plans for the future of your business if not for private investors, perhaps for yourself and your most trusted staff. The good practices that come with attracting investors are in no way restricted to businesses on that certain path. Invest in your business’s future, one way or another.

Small businesses are being created now more than ever, thanks to people being laid off or furloughed during the COVID-19 pandemic and the advent of online tools aimed at helping budding entrepreneurs. In April 2021, roughly 500,000 people in the U.S. applied for new business applications, compared to just 300,000 in the same month of 2020, according to the Bureau of Labor Statistics.

While the current climate may make the decision to start your own business easier than ever before, it certainly doesn’t mean that starting a new business is easy. While creating your small business from scratch does start with a dream, a great idea and some funding, you’ll probably also need online training, business acumen and an understanding of some basic financial and marketing principles to get going. 

Mapping Out Your Business

Whether you are launching a construction business, retail store, business services firm or an eCommerce site, before you even think about funding, you’ll need to produce a business plan. 

A business plan is a specific outline of your business, what it will entail and how it will make money. If you plan to seek initial investors for your business, be it angel or venture cap investors or through crowdsourcing, you’re going to need one. 

Source: Growthink

There are cost-effective online tools out there that can provide you with a template for a presentable business plan, such as this one from Growthink, that can make it easy for you – all you have to do is plug in the text and the program will do the rest for you. The basic ingredients of a plan for a new business are:

• Executive Summary

The executive summary should clearly tell the reader what you want to accomplish as a business, and why your business is special. This is often referred to as a mission statement and is extremely important to potential investors. All too often, this is buried in the middle of the business plan but needs to be stated upfront.

• Business Description 

The business description should include a clear description of your industry, as well as the products or services you are seeking to sell within it. This is your chance to describe why your product or service stands out in the industry and why you think customers will choose it over your competitors. 

• Marketing Strategy

This part of the business plan requires a meticulous analysis of the market you are trying to sell your product in, and who you want to sell your product or services to. As an entrepreneur, you need to be familiar with all aspects of the market you’re looking to sell in, as well as carefully define your target market so that your company can be positioned to garner its share of sales.

• Competitive Analysis

Present a description of what your competitors offer, what their strengths and weaknesses are, and how big the market is in which you are trying to sell. Then, clearly explain what gives your business a competitive advantage. Put simply, why do you think consumers will choose your products or services over your competitors? 

• Design and Development Plan

The purpose of a design and development plan is to provide a description of the design of your products or services, chart their development within the context of production, marketing and the company itself, and create a development budget that will enable your company to reach its goals.

• Operations and Management Plan

This plan describes how your business will function on a continuing basis. Who, if anyone, is going to be in charge besides yourself? Where will your business function and what kind of equipment and inventory will you need? Who will you need to hire and for what functions? 

Put simply, the plan will clearly explain the various responsibilities of your management team (if you plan to have one), the tasks assigned to each person in your company, as well as the capital and expense requirements related to the operations of the business. 

If the only employee will be you, you need to clearly spell out what kind of compensation you will need for yourself, as well as the equipment, supplies and space you will need to make your business operate smoothly. 

Business Basics

In planning out a new business, you need to learn basic business terms and why they’re important. There are online courses (and many of them are free!) to teach you the basics of managing a business, such as what sales and profit margins are, customer retention and conversion, etc. 

In order to successfully launch your business, here are some basic business terms you should familiarize yourself with right off the bat:

• Sales Margin 

Also known as contribution margin, this metric basically determines what you should be charging for your products or services in order to be profitable. It is the amount of money you charge for your product minus the cost associated with producing your product or service. Those costs include manufacturing costs, advertising/marketing and salaries. 

• Customer Acquisition Cost

This metric helps determine what each sale costs. Simply add up the cost of marketing and sales — including salaries and overhead — and divide by the number of customers you land during a specific time frame.

• Customer Retention Rate

Customer retention rate is a key metric that essentially tells you if your customers are happy, and will help you determine how quickly you can grow your business. It measures what percentage of your customers have kept coming back over a period of time, and can be calculated over a weekly, monthly or annual basis, depending on your preference.

• Customer Conversion Rate

This metric basically tells you whether your marketing and sales efforts are paying off. It is simply the percentage of people who walk into your business or visit your website who end up becoming customers. If the conversion rate is low, you may want to change the way you are marketing or advertising your business. You may want to offer more discounts on your website if your conversion rate is low, for example. 

• Revenue Percentages

If your small business is like most, you probably have more than one source of revenue. Where your revenue is coming from will tell you about shifting trends in your market and what consumers are spending money on. 

For example, if you run a small contracting business, you may get revenue from customers who want to build new homes and revenue from customers who want to renovate their homes. If you notice that, suddenly, many more customers are interested in home renovation rather than new home building, you may want to change your marketing efforts accordingly. 

Build a Website

Whether you’re a doctor or a plumber, it is virtually impossible today to run your business without having an online presence. When consumers search for your services, the first place they will search is the internet. 

Having an online presence means that potential customers can easily find you via a web search, know what products or services you offer, and what makes you unique. You can even set up your website to make direct sales.

Building your own website does not have to be costly, as there are plenty of do-it-yourself website builders such as Wix and SQUARESPACE that can make it easy. In a previous article, Kapitus offered a step-by-step guide to building your own site.

Potential Funding Sources

When you’re looking to start a business, traditional and alternative small business lending sources are probably not an option, since most require years in business. There are funding sources available to you, however, if your personal savings and help from friends and family members are not enough to start your own business:

• Angel Investors

This option is pretty much what the hit show “Shark Tank” is about. Angel investors are individuals who are willing to invest in start-ups or early stage companies, typically between $25,000 to $100,000, in exchange for a piece of ownership. Their hope is that their investments will pay off big when your company either goes public or when your company becomes big enough so that you can comfortably buy out their pieces of ownership for a hefty sum more than the amount that they originally invested. 

Source: Angel List

Angel investors are often successful entrepreneurs themselves and can offer mentorship and business advice, and typically want to see a strong business plan as well as your plans for growth before they invest. You can find angel investors from other entrepreneurs, or search online through sites such as Angel List.

• Crowdfunding 

Crowdfunding is becoming one of the most popular ways to garner funds for startup businesses. It is the practice of raising funds through popular crowdfunding websites. 

Setting up a crowdfunding campaign is relatively easy. In most cases, all it takes is setting up a profile on a crowdfunding site, describing your company and its business, and the amount of money you are seeking to raise. In order to attract investors, your business plan and products must seem compelling and differentiating. 

One of the best features of a typical crowdfunding plan is that you usually don’t have to give up pieces of ownership in your business, as people who are interested in investing typically do so in exchange for some kind of reward from your business, such as a discount based on the amount donated, or some form of profit sharing in your business.

Equity crowdfunding, however, is when you are selling stock or some other interest in your company in exchange for cash, and requires compliance with federal and state securities laws. In this form of crowdfunding, you should consult with an investment attorney.

Crowdfunding sites usually charge a fee to list your campaign, which will either be a processing fee or a percentage of the funds raised. Some of the most popular sites include Kickstarter, Indiegogo, Crowd Supply, Crowdfunder and SeedInvest.

• Grants

There are several private grants available through application for startup and small businesses that could reward you with $10,000 to $150,000 in startup cash, especially if you are launching a woman- or minority-owned business.  Additionally, there are some grants offered through the U.S. Small Business Administration. Some of these grants usually require a business to be community-related or involve mentorship of some kind, so be sure to carefully examine the requirements before applying. 

• Small Business Credit Cards

Since traditional and alternative business loans are not typically available for startup businesses, you may want to apply for a business credit card. These types of cards often require a strong personal credit score – not years in business – so they may be a good alternative funding source. Like with any credit card, interest is only charged on the amount borrowed, and these cards often come with perks such as cash back rewards, airline mileage points and discounts with selected retailers. 

In the past year, a number of credit card issuers have offered cards that specifically focus on the small business market and do not require personal guarantees, which means use of the card will not impact your personal credit score. One example is Brex, which offers a small business card for early-stage technology companies with professional funding. The credit limits may be substantially higher than traditional credit cards, and they often provide valuable rewards.

• Venture Capital

Of course, VC funding is usually thought of first as a funding source for startup companies, but they often have the most stringent requirements. VC managers typically want to see strong business plans, and often require seats on company boards, right of first refusal, anti-dilution protection and high ownership stakes. It is often difficult to obtain VC funding as most fund managers are inundated with funding requests and often only accept pitches through referrals from trusted sources, such as other successful startups and successful entrepreneurs. 

Several rounds of funding are often involved, and most VC fund managers are seeking highly profitable exit strategies, such as an IPO or an acquisition, even though most startup businesses do not have any such plans on their horizons. If your startup business does have grand plans of becoming the next Amazon or Microsoft, then VC funding may be for you. 

Starting your own business may be a complex, exhausting task that will require hard work and long hours, but in the end, the thought of being your own boss, setting your own hours and not having limits on your compensation to support you and your family may be worth it if you have a dream and a great idea.

After crunching for year-end deadlines, the arrival of a new year–and decade–gives you a chance to take a breath, reevaluate your business and get back on track. Depending on the seasonality of your products, January may be a good time to make changes and begin long-term projects to help your company run better. Here’s a list of items to consider adding to your Small Business New Year Checklist for 2020 and beyond.

Formal Goal Setting

This may be the year to start setting clear business goals if you haven’t done so in the past. What do you want to get out of your company? What are some areas of potential improvement? Are you happy with the amount of business you bring in, or would you like to try new strategies to increase growth? Setting formal goals with a supporting action plan can help you propel your business forward.

Implementing Process Changes

If something is simply not working and causing you unnecessary stress, the start of the new year is a good time to revamp a broken process. Does your equipment need to be upgraded? Have you outgrown your manual record-keeping system? Would you benefit from technology that streamlines financial recordkeeping?

Develop a Budget

Goal setting and strategizing are big picture tasks. Experienced owners also recognize the importance of setting a detailed budget to keep spending in check. At the very least, start tracking your business spending. Open a separate bank account or credit card to help determine where the company’s money goes. Look for opportunities to improve profitability by lowering expenses.

Review Insurance Coverage

Has your business changed significantly in the last year? You should review insurance policies annually and add new items to coverages to reduce loss risk.

Tax Preparation

The beginning of the year is also tax prep season. Resolve to start the process early and know when your deadlines are. You may also want to research small business tax credits that you may qualify for.

Tax Planning

As you prepare tax forms for last year, keep an eye out for opportunities to save in the future. If tax laws change, research the ways they may affect your company. Consult with a tax expert, if warranted.

Facilitate Growth

You may need to invest in your business and prepare to handle more customers and higher sales volumes to increase growth. A new truck, expanding to another storefront, or hiring more employees will increase your expenses in the short-term, but also help to facilitate expansion. To help manage cash flow during growth periods, look into business financing options.

Start the new decade off right by using this small business new year checklist: set clear goals supported by tangible actions steps. Develop a budget and keep an eye on cash flow to determine how you’ll manage your company through the coming weeks and months. The new year is a chance to start over and improve your business aspirations. It is the perfect time to make improvements and upgrades to your company.

A strong economic outlook is driving consumer optimism, and as a business owner, you may be similarly inspired to pursue growth. Small businesses are looking towards the future with a bright outlook, according to the NFIB Research Foundation’s latest optimism index survey. The August 2018 report found a record number of business owners — 34 percent — have plans to expand.

As the fourth quarter approaches, consider what you can do now to wrap up the year on a high note.

Fill out the Ranks if Necessary

If you run a retail store or a service-based business that tends to be busier during the holidays, now’s the time to think about increasing your staff.

Review last year’s sales and run an estimated projection for this year’s numbers to get an idea of how strong customer demand is likely to be. That can help you gauge how many employees you need to hire and how to schedule them. Remember to give yourself enough time to fully on-board new hires ahead of the holiday rush.

Check Your Inventory Numbers

The business owners included in the small business optimism index report had an eye on boosting their inventory stock. Ten percent said they planned to increase inventory, the strongest numbers since 2005.

Go back to the sales projections you calculated earlier and compare those numbers to the inventory you have on hand. If certain items tend to be scarce around the holidays, get in touch with your vendors to see if you can pre-order those to avoid selling out when customer traffic peaks. Also, work out delivery schedules in advance so you know when new inventory will arrive.

Begin Your Tax Prep

The next payment deadline for quarterly estimated taxes is right around the corner in January. Yet another good reason to run estimates of sales projections through the fourth quarter is to ensure that you’re setting aside enough money over the next few months to cover your estimated tax obligation.

You can also use the fourth quarter to begin prepping for next year’s tax filing. Start looking for deductible expenses and add up business losses (if any) year to date. If you’re planning to spend capital on something big, such as new equipment, consider whether it makes more sense to do that now or defer your purchase until the beginning of the year.

Consider Financing Sooner, Rather Than Later

One thing small business owners aren’t optimistic about, according to the survey, is an improvement in credit conditions. With interest rates continuing to rise, borrowing may become more expensive.

If you think you may need an equipment or inventory loan, or just a working capital loan to finish up the fourth quarter, check your credit to see how likely you are to qualify. And of course, take time to compare borrowing options from different lenders to find the best fit for your financing needs.

No matter how you look at it, owning a business for one year is a huge accomplishment. You’ve gone through the legal paperwork, filed taxes, signed a lease and a million other things, not to mention you’ve paid your bills! But many common challenges will start to pop up after those 12 months.

This is a time to celebrate, but it’s also a time when new challenges will arrive. To prepare you, here are four of the most common difficulties small business owners face at the one-year mark.

Staying true to your vision

Running a small business is like going through an obstacle course. You may have a path picked out, but navigating the various hurdles, monkey bars, slides and ball pits will ultimately determine the path you take. Many opportunities, as well as problems, may arise during your first year, but stay focused on your original goal and on the thing your business can do better than any other.

Maintaining the momentum

A new business generates buzz and gets people talking. This is a gift for the owner. However, that initial buzz fades out quickly. A challenge many small businesses face is in keeping that momentum alive. To do this, they might have to get creative with marketing efforts, network with the right people, participate in the community and have a robust social media presence. These things might not be directly connected to your day-to-day operations, but are essential parts of a successful marketing effort.

Here are some of the small business marketing trends to be aware of in 2018.

Managing cash flow

One of the most common growing pains small businesses experience is in properly managing their cash flow. This can come in various forms. Whether it’s keeping proper accounting records, paying invoices on time (or getting paid on time), or juggling purchases and inventory, many small business owners are not prepared for some of these more knotty difficulties.

Learning to let others handle it

Your business is your child, and it’s hard let it grow up and out of your sight. Almost every business owner struggles with the problem of when to delegate a task or let someone else handle an important aspect of the business. After a year in business you’ll probably be on track to expand and grow. Success means there will be more work to do, and if you don’t learn how to delegate, you will be stretched beyond capacity.

For many, the first year in business is one of the most exciting — and challenging — years of their life. But it’s only the beginning. With new challenges come new opportunities for growth, job creation and the formation of a company culture.