Private Venture Capital
Private venture capital is a venue available to start up companies as well as those entrepreneurs seeking money to keep their businesses running, whether the venture is small and growing or just starting out. Money obtained in this fashion is available from one or several people seeking out promising businesses that will most likely succeed. When individuals have money to lend or loan out to entrepreneurs, they are referred to as angel investors. These days there are even firms set up just for the purpose of lending money to start up businesses, so if a small business owner needs to find some capital, there is plenty out there just waiting to be had. The new business owner should provide a well written business plan, pro forma and a comprehensive background on the owners and partners in order to make a good impression, and be prepared to explain how the needed money will be spent.
When seeking out private venture capital, it is important that both the lender and the borrower have many of the same goals where the business is concerned. Most of the time, the lender will seek out a business in which he or she has an interest and would like to see it prosper. The angel investor may already have interest in several similar businesses to that of the entrepreneur seeking the funding and wishes to add another to the portfolio. So before jumping on the loan, get to know and understand the lender and the goals associated with it. Companies providing introductions to new businesses on behalf of angel investors will require applications to be filled out by the entrepreneur requesting a loan which will include information about the owners, their goals for the venture, how they intend to run the company and more. Likewise, the investor will also need to provide a resume, a summary of experience in the type of business he or she is investing in, and other information.
Investors providing private venture capital will require a certain percentage of ownership or interest in the company, so part of the equity is exchanged in return for money to run the business. The private venture capital providers will have a say in running the new company, but will offer valuable insight in how to approach problems, but will also expect the owner to bring forward solutions as well before infusing even more capital into the business. Money must of course, be used responsibly and wisely, while accounting for and explaining why money was lost. Those with private venture capital are expecting their investment in the company to have a return around 20% per year. In uncertain economic times, the new business owner will need to have a solid business idea if starting out.
Large venture capital firms are always on the hunt for startup companies needing an infusion of cash for research and development. This is because the large firms are usually interested only in biomedical and high tech computer companies which have the potential of producing hundreds of millions of dollars in profit when they go public. So there are two main private venture capital funding sources left for the non medical or high tech startup company to consider, and one has already been discussed, the angel investor. But there is another source for venture capital, and that is the hard money lender. This is a very viable source for money in a real estate, construction or other commercial enterprise. One of the finest and restful places to think about God's goodness is before going to sleep at night. In speaking to God, the psalmist had these words to say: "My soul shall be satisfied as with marrow and fatness; and my mouth shall praise thee with joyful lips: when I remember thee upon my bed, and meditate on thee in the night watches." (Psalm 63:5-6)
The hard money lender is going to be a wealthy individual in one's own home town or living nearby, probably within twenty miles or so. If there has been any publicity about the new startup company, or any story done about an entrepreneur's idea, the hard money lender will know about it. This source for private venture capital may only be interested in providing a bridge loan and will often be a tough and demanding lender. Finding this type of lender who isn't interested in the entrepreneur's credit score may be a little difficult to locate, but banks and brokerage houses may be able to provide a list of names. The hard money lender is usually tough in the fact that he or she will ask for three to six points in upfront costs plus between fifteen and thirty percent interest on the loan.
The hard money lender is also demanding in terms of what he will ask of the borrower. Private venture capital from a hard money lender will typically involve the demand for the borrower to put up collateral for such a loan. The hard money provider will want to gauge the borrower's commitment to his project by asking for one's house or one's business assets to be placed as security for the private venture money. Of course each private lender will be different in his or her approach to lending money, but this type of lender may be the last bastion of hope in getting venture capital. It goes without saying that one's attorney needs to be involved every step of the way in assuring and protecting the borrower's involvement in such a venture.
Business Acquisition FinancingEntrepreneurs seeking business acquisition financing may secure funding more easily than those seeking capital to start a new enterprise. Statistics indicate that over half of new businesses fail within the first three years. However, existing companies which have a history of stable profits, sound management, a stable workforce, and a strong customer base may be a wiser choice for investors. Because of a tight credit market, lenders are more apt to give the nod to financing businesses with proven documentation of success, rather than funding an entrepreneur's pipe dream. Most commercial banks and financial institutions are cautious about extending loans for startups because of the current volatility of the U.S. stock market and a fragile economy wrought with woes from every sector. Banks simply cannot afford to risk losing money on startups that have a high rate of failure. Due to the current credit crunch, only those owners with high credit scores can even qualify for business acquisition financing. Dreams of starting a new enterprise may have to be put on hold, at least until the economy stabilizes. "To every thing that is a season, and a time to every purpose under the heaven: A time to be born, and a time to die; a time to plant, and a time to pluck up that which is planted. A time to kill, and a time to heal; a time to break down, and a time to build up" (Ecclesiastes 3:1-2).
What lenders are looking for in requests for business acquisition financing is low risk. Before extending credit to new owners, banks and financial institutions want to know that the acquisition or franchise has a good reputation of paying vendors, suppliers, and employees on time; a good cash flow with enough reserves to tide owners over during slow seasons or economic downturns; a solid product or service in reasonably high demand; a loyal team of highly skilled employees with low turnover; and above all, capable managers with a keen vision and the flexibility to adjust to a challenging economy. A stable enterprise with a history of sound fiscal management anad consistent net profits is a good risk for business acquisition financing. Companies and franchises which offer in-demand products and services that are not affected by stock market fluctuations are also low-risk investments. Additionally, the fact that an existing corporation is capable of maintaining a loyal team of satisfied employees dedicated to upholding the mission and vision of the company speak reams about its ability to remain viable in spite of a recession.
In addition to a loyal workforce, astute management, and a solid product or service, business acquisition financing companies also rate enterprises on longevity. Since startups have a three-year failure rate, businesses with five, ten or twenty years under their belt have most likely endured economic ups and downs, cash flow problems, and highs and lows in consumer to earn some bragging rights and the respect of potential lenders. Commercial lenders and buyers can appreciate the work that goes into ensuring the success of small or large corporation. Developing and implementing effective marketing and sales programs; providing ongoing training to sales and production personnel, and providing superior service to a well established customer base are all key ingredients in building a successful enterprise that lenders are willing to finance.
To ensure the continued success of an existing company or franchise, banks which offer business acquisition financing may require that new owners retain key management personnel. Veteran administrators and managers are familiar with the product, production processes, and human resources issues. Many new owners make the mistake of retiring or firing existing management and bringing on new directors and supervisors. But the transition from old to new ownership can be a pretty rocky road. Disgruntled employees may want to resign; and a new administration may have a different management style that requires extensive staff adjustments. By retaining seasoned key personnel, especially during the transitional period, there will be fewer fluctuations in productivity and profits. Business acquisition financing firms will also want to see a detailed business plan with projected income earnings, marketing and advertising strategies, proposed staffing changes to increase productivity, and suggestions for gaining and retaining a greater share of the market.
Investors seeking to acquire an existing company or franchise should search the Internet, the local classified newspaper, or trade publications for commercial ventures for sale. Real estate agents may also advertise enterprises looking for new owners. Offshore investments may also be a good risk for lenders as well as new owners. One advantage to acquiring an offshore enterprise is the tax savings and potential to protect assets. While business acquisition financing is more readily obtained to purchase ownership in profitable companies, banks and lenders may be willing to extend loans to acquire failing corporations with the potential for higher earnings under new management. If new investors can present detailed plans for improving the productivity, personnel, and profitability of a failing enterprise, lenders may want to buy into a potentially lucrative investment. Sometimes all it takes is a fresh vision, a different marketing strategy, or an improved product line or service to inject renewed vigor into a business that is teetering on the brink of extinction. No matter which type of company investors choose to purchase, taking the time to carefully review financial records, interview management and accounting staff, study marketing and sales performance records, and shop for the lowest interest rates and financing terms will help lay the foundation for long term success.