Your big idea has got to start somewhere, and that somewhere usually involves some start-up capital.
Starting up a business often involves large costs initially which can be difficult to manage alone. Add to this location, staff, budgeting and planning and starting a business could become an emotional rollercoaster. For this reason many entrepreneurs consider the use of investors to help with the financial risks on the business set-up. Rather than trying to manage the business alone, investors can take a significant load off the financial risks taken in the initial start-up phase.
Before you make up your mind, consider fully the pros and cons of getting an investor on board.
• One of the primary reasons small business fail is often due to a lack of cash flow. Having an investor can overcome this, or the inability to anticipate sufficient funds in the initial start-up phase by providing financial assistance that is not necessarily classified as a ‘loan’.
• “Silent” investors who invest money but remain separate to daily management are a good way to fund your business without losing control over the primary business operations. In other words, there are fewer cooks to spoil the broth.
• Where banks may be reluctant to lend loans based on potential, private investors are often less risk averse than traditional lenders.
• Investors often have high expectations as to how and when they are repaid, as they now have partial ownership of the business. Before you ink anything, be sure you have a thorough discussion to set your expectations right.
• Investors can hinder the decision making process as their primary focus may not be business success, but rather their own personal investment returns.
• Documenting every possible eventuality with a solicitor can alleviate such issues, but can also become costly to the business.
• Having investors who are friends or family may put a strain on the relationship should the business take a turn for the worse. Not only that, personal relationships may also interfere with your business decision-making process.
As every start-up is different, when to introduce investors into your business can vary considerably, depending on its growth and progress. Whilst it is most common to have investors during the initial start-up phase to ease financial risks, investors can still be valuable once a business is well developed and stable.
Introducing investors just before a new launch of a service or product is also beneficial as the business is at a high-risk period of financial challenges. Timing investors for these events allows business owners/management to focus on delivering the best long-term outcomes without being hindered by short-term cash flow considerations.
Should you ultimately decide on bringing in investors, the key to convince them is a thorough, well researched business plan and the confidence to sell and implement it well.
John Corias is a Senior Partner at MAS Accountants, specialists in small business accounting.