Potential Investor

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Explaining Equity Investments to Potential Investors of Your Small Business

July 16, 2018 - 1:00 pm
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Starting a small business is an exciting venture, but like most things, it requires funding. If you don't have the funds to do it yourself, then you might want to consider asking people to invest in your company. As far as investments go for small businesses, there are two types of investments — equity or debt. Each have their shares of pros and cons like anything else, which are worth examining.

 

Understanding equity investments

Equity investments are best described as an exchange where investors acquire an ownership stake in a company. Typically, they provide some form of capital, often money, in return for a percentage of profit. This can be a set percentage or can be a percentage in proportion to how much capital an investor provides. Of course, owning equity in a business means the investor holds a share in the company, which allows investors to feel as if they are a real part of the business. This is a great benefit to pitch when finding investors.

 

Laying the groundwork

Before broaching investors on equity investments, you first need to have the right foundation that will make your small business desirable. The best laid foundation is having a concrete and compelling business plan. Your business plan should have detailed information on your business, a marketing analysis and plan, and explain the structure of your company.

 

Return on investment

The biggest selling point for potential investors of your small business will be what kind of return on investment (ROI) they can expect. Having a specific and actionable business plan, as mentioned above, will help provide those answers for you and your potential investors. As part of understanding their potential ROI, investors will also want to know exactly where their money is going and how it will be used. Once a small business opens up to shareholders, they need to be sure to be transparent and share all necessary information to their investors. Being able to clearly provide and backup your business idea will be another great selling point to your potential investors.

 

Larger reach

If you are thinking big, then one possible option is also equity crowdfunding. This is great for startup companies that just need to raise money for their initial start versus multiple rounds of investments. However, keep in mind that these are unaccredited investors, so if you go this route it may make it more difficult to reach out to venture capitalists down the road.

 

There are many factors to consider when making the choice to have equity investments for your small business. For small businesses that can show they will yield a great return for their potential investors, it is a great option.

 

This article was written by Suzy Fielders for Small Business Pulse