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Types of Financing for Small Businesses

Venture capitalists demand competitive rates of return and exit opportunities. Angel investors typically invest $250,000 to $1,000,000 in each project. Additionally, the costs related to this type of capital within your business is extremely high given that you are going to need to provide a certain level of equity and control of your business to a third party funding source.

An entrepreneur should either become educated prior to entering the field or at the least, partner with someone who has the needed experience in order to receive the financing that is needed in order to raise capital. Your experience should be clearly showcased throughout any documentation that is to be provided to a venture capital firm or angel investor

Only a licensed attorney that is familiar with securities can produce a private placement memorandum under the half if you are seeking private capital from a third party source. Professional investors use fairly reliable criteria when selecting which businesses they think will succeed. As such, you and your attorney should carefully evaluate these issues as you progress through the capital raising process.

An initial conception of the business is provided by a business plan. You should take the viewpoint of a type of third-party funding source when you’re drafting your business plan for any type of funding source. On a side note, by guaranteeing loans made by private investors, the SBA makes loans more available to small businesses. The eight year survival for an incorporated business is as high as 50% provided that you have a strong business plan and can produce a strong return on investment. If you own a high gross margin income type of business and will be in your best interest to work with a small business investment company as they will not take as much equity as an angel investor or a venture capital firm.

A business plan will help to eliminate the possibility that you have over looked anything in the development of your new business. If you are not seeking equity financing, it should be noted that the SBA invested $4.5 billion in small business through its venture capital program in addition to providing a number of loans. As we have discussed before, angel investors are seeking large returns on investment.

In closing, it is extremely important that you take into consideration each type of financing that is available to you as some of these capital structures come at an extremely high cost. As always, you can consult with a business adviser, attorney, or CPA to assist you in determining which type of financing is most appropriate for your business.