There are many ways to find funding for your business. From friends and family to conventional bank loans, our healthy economy means there's tons of money out there for SMBs to grab. If you're struggling to get financing – or just starting to look for it – it's important to consider all your options. Private funding sources can differ from standard financiers because of what they bring to the table.
"The type of financing a company does should be dictated by what the money is going to be used for," said Casey Berman, founder and managing director of Camber Creek. "What is the investor going to bring other than money?"
Venture capital firms invest money in startups, usually in exchange for equity in the company. They analyze business plans, financial statements and other business details to determine the overall expected return on their investment. In many cases, venture capitalists can provide guidance to young companies, like mentorship, access to sales networks and other development opportunities.
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Camber Creek is a venture capitalist firm based in Washington, D.C. that specializes in real estate technology. Berman says Camber Creek focuses on adding value to the startups it invests in by giving them access to its network. This gives Camber Creek an opportunity to understand how a company operates before investing.
"If a company is looking for private funding, looking for more than just money is key," he said. "In a lot of circumstances, the money might be more expensive than bank debt. However, the value that can be created through that partnership far outweighs a low interest rate."
The downside to working with a VC – as with any lender looking for equity – is that you'll be giving up a certain percentage of your company. It also means that you'll have a third party to answer to as your business grows and changes. It's important to partner with a VC that has your shared interest in mind and understands you and your business.
Much like venture capitalists, angel investors finance startup companies, usually for equity in the company. The main difference between venture capitalists and angel investors is that angel investors may be smaller and can provide different value. They also may have different ROI requirements from VCs. Berman said some VCs are looking for 100 percent growth year over year.
"Not all money is created equal," he said. "A venture capitalist is going to structure a deal one way, a private equity firm is going to structure a deal a different way, and an angel investor is going to do a different deal."
Alternative online and fintech lenders can be a great funding option for small business owners. They provide short-term, high-interest loans for business owners looking to quickly grow and expand their business with capital. The biggest draw of these lenders, however, is their flexibility.
Alternative lenders rarely require equity like an angel investor or venture capitalist firm. Instead, they provide loan agreements that mirror conventional banks but usually have much more relaxed requirements to qualify and higher interest rates. Alternative lenders also have various loan packages and types, like invoice factoring, merchant cash advances, lines of credit and equipment financing. This flexibility makes alternative lenders the most viable option for some businesses.
The downsides to alternative lenders are the high interest rates and potentially demanding loan agreements. Therefore, though these loans can be easy to qualify for, they're best for businesses that have access to the capital to cover these short-term loans. Alternative lenders have the most demanding loan terms and agreements compared to VCs, angel investors, conventional banks and loans through the SBA program. While this can be a good avenue for financing, it's important to assess the overall risk to your business.
The bottom line
Finding the right type of financing for your business means knowing what you need the money for and what lender makes the most sense for you to partner with. If you're starting a new business, a venture capitalist firm can give you the guidance you need to get off the ground. Alternative lenders are best for short-term, high-interest loans for any type of business.
Regardless of the type of financing you need, the best way to find financing is through networking and connecting with investors of all types. Once you target a few, you can partner with the company that makes the most sense for your business.