Posted in Entrepreneurial Funding Blog Posts

Venture Capitalists

Over the last eight weeks, we have discussed funding sources available for a startup or existing businesses in the infancy stage. I have covered, Small Business Administration 7(a) Lending, SBA Microloans, using credit cards, non-bank lenders, and Angel investors. In my final post on funding, I would like to discuss Venture Capitalism. Investopedia defines Venture Capitalist as, “an investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to additional funds.” (Investopedia.com) Venture Capitalists act similar to Angel investors, however, instead of investing personal funds they utilize a firm’s capital to make investment deals.

VC’s are all about a company’s valuation, strong management, and a keen competitive advantage. Their goal is to invest low and yield high returns with a controlling interest. As an entrepreneur, it is imperative to have an idea as to what you are willing to give up when seeking venture capital. Actually, when seeking funds from any investor. I would not be uncompromising, but I would advise an entrepreneur to consider if a VC deal would be a good fit.

In the book Entrepreneurial Finance – Finance and Business Strategies for the Serious Entrepreneur, Rogers and Makonnen quoted a VC saying, “I’m going to pay you as little as possible for a much of your company as I can get.” Entrepreneurs need to be cautious not to give away too much of their company for the sake of getting capital. Yes, VC’s investment needs to yield a profitable ROI especially because they are assuming so much risk. However, the entrepreneur should not “make a deal with the Devil,” to get the necessary funding.

Please note that I am not saying all VC’s are bad, but they are “in it to win,” as all investors are. Entrepreneurs just need to be aware that VC’s usually require a large stake in the company to make an investment. Between Venture Capitalist and Angels, I am in favor of Angels. What about you? Overall what investment option do you think would work best for you?

Sources:

Venture Capitalist – Investopedia – Sharper Insight (N.D.). Retrieved from http://www.investopedia.com/terms/v/venturecapitalist.asp

Roger, S. & Makonnen, R. E. (2014) Entrepreneurial Finance – Third Edition: Finance and Business Strategies for the Serious Entrepreneur [Kindle Edition]. McGraw-Hill Education & Amazon Digital Services LLC

 

Posted in Entrepreneurial Funding Blog Posts

Angel Investors

Angels are typically men and women that attained a certain level of wealth and can set aside large seed capital to invest in new business ventures. Amis & Stevenson considered Angel investing to be extremely risky but helpful to an entrepreneur that is trying to raise funds. Angels also operate in networks and have specific areas they choose to invest based on their expertise.

Angel’s invest based off of a company’s valuation. Entrepreneurs can either settle for an individual or host several angels. Depending on the terms of investment, Angels can become stake owners or be a coach to assist the entrepreneur as needed.

In the book, Entrepreneurial Finance – Third Edition: Finance and Business Strategies for the Serious Entrepreneur, Rogers and Makonnen discuss the positive and negatives of Angel investing.

Positive:

  • Seed capital available for true startups
  • Angels are typically experienced business professionals that invest in their area of expertise.
  • Angels are typically more lenient than firm investors.

Negative:

  • Some Angels require an active role in business decisions and operations
  • Angel may only agree to invest a limited amount.
  • Return on Investment must match seed capital and have excess residuals.

Angel investments are similar Venture Capitalist investments, except seed capital tends to be higher because of VC firm caps. Having an Angel investor is optimal for an entrepreneur because their venture is getting funded and investment capital does not require collateral. The hardest part for an entrepreneur is actually getting a meeting with Angels and having them believe in their vision and ability to give them a worthy Return on Investment (ROI).

Sources:

Amis, D. & Stevenson, H. (2001). Winning Angels: The 7 Fundamentals of Early Stage Investing. London: Financial Times Prentice Hall

Roger, S. & Makonnen, R. E. (2014) Entrepreneurial Finance – Third Edition: Finance and Business Strategies for the Serious Entrepreneur [Kindle Edition]. McGraw-Hill Education & Amazon Digital Services LLC

Posted in Entrepreneurial Funding Blog Posts

Non-Bank Lenders

So far I have discussed Small Business Administration 7(a), SBA Microloans, and Credit Cards as funding options for a startup or new business venture. Another lending option an entrepreneur should consider is non-bank lenders. Non-bank lenders are also referred to as “Alternative Lenders,” which provide a range of loan options outside the traditional bank loans. The approval for a loan is a lot faster and easier. However, percentage rates are also a lot higher. As the adage says, “Everything comes with a price.” There are several top alternative lenders, and each has its pros and cons.

Attaining capital for a new venture can seem like a never-ending battle. Especially if there are continual growth and your initial investment cannot cover expansion costs. It is imperative that an entrepreneur have access to the funds necessary to keep the business running and also have an affordable repayment plan. It is one thing to need money to make money, but it’s another not to be able to afford the money you need. Assessing a lender’s repayment rates and terms are imperative before making a final decision. Faster and easier can sometimes come off as a “Get rich, quick scheme” if one is not careful.

The Small Business Administration, Office of Advocacy, defines non-bank as “Lenders that provide a range of products and services, such as merchant cash advances, business lines of credit, and installment loans, the latter two of which may mimic similar products offered by banks.” (SBA.gov) Non-banks should be considered for individuals that credit issues but are actively opening a business or those who need immediate funds and cannot necessarily wait the length of time it takes to receive from a bank lender.

Here are four highly rated non-bank lenders:

Fundation – offers term loans for equipment or expansion improvements and working capital loans when operating cash is low. Loan range from $20,000 to $500,000 with annual interest rates ranging from 7.99% to 29.99%. (Fundation.com) Repayment terms are from 1 to 4 years with two pay frequencies. Minimum requirements include a good credit rating, $100,000 in annual sales, and in business for at least year with three employees.

Kabbage – offers lines of credit that range from $2,000 to $150,000. Repayment must be made with six to twelve months; fees are associated instead of interest. Depending on the loan, fees are 1 to 12 percent of the line of credit. Kabbage applications require your business account to be linked to the application for review and only takes ten minutes receive a yay or nay. Once approved,k Kabbage makes funds are available immediately for use. (Kabbage.com)

Accion – offers microloans specifically for small business startups. Credit scores can be no lower than 575 and entrepreneur must be able to prove a steady cash flow of $2500 and be in business for at least 3 months. Loans amounts range from $10,000 to $100,000 with percentage rates starting at 10.99%, and payments must be made on a monthly basis until the loan is paid. Accion offers loans based on state. For North Carolina, they offer loans for daycare services, food and beverage small business, startups that are based in the home, and existing businesses. (Accion.com)

OnDeck – offers fixed rate loans up to $500,000 and lines of credit up to $100,000 to individuals who have been in business for a year with at least a 500 credit rating and annual sales of $100,000. Repayments must be made with three years and paid on a weekly basis. Annual percentage rates range from 9.99% to 13.99%. (OnDeck.com)

Consequently, “Non-bank loans and online loans present an opportunity to procure capital more quickly and more easily. In turn, small businesses may be able to manage financial emergencies better or take advantage of unanticipated growth opportunities.” (SBA.gov) In my opinion, non-banks have similar percentage rates to credit cards but have higher limits to loan. The great thing about non-banks is you have options to pick which one fits your business needs.

Sources:

Office of Economic Research Staff (n.d.) INTEREST RATES AND NON-BANK LENDING TO SMALL BUSINESSES. Small Business Administration Office of Advocacy Retrieved via https://www.sba.gov/sites/default/files/advocacy/Interestratesissuebrief508compliant.pdf

Fundation (n.d.) Loan Products Retrieved via http://www.fundation.com/borrowers/

Kabbage (n.d.) Business Loans Retrieved via https://www.kabbage.com/?afsrc=1&refid=cj&PID=3934861#

Accion (n.d.) Loan Types Retrieved via http://us.accion.org/how-to-apply/loan-types/north-carolina

OnDeck (n.d.) Business Loans Retrieved via https://www.ondeck.com/business-loans