A 2011 study by Pepperdine University shows that although US banks report a substantial jump in the volume and standard of applications they receive, they continue to reject the majority.
It’s a similar state of affairs here in Australia, where small businesses are faced with a conundrum when it comes to choosing the right investment channels. SMEs are increasingly required to apply the ingenuity, lateral thinking and risk management associated with running their business, to the process of securing investment as well.
So how exactly should an SME navigate these channels? Luckily, we’ve taken the hard work out of it for you.
Historically, small businesses have enlisted the help of financial institutions for that much-needed cash injection. However, the Sensis Business Index of SMEs released in March 2012 has shown business confidence is at a new low, a fact that helps explain the banks’ newfound reluctance to lend.
If you do approach a bank for a business loan, ensure that your finances are watertight. Request a credit check for yourself, make sure you keep meticulous records and be prepared to put your assets on the line.
Also make sure you’re armed with a comprehensive business plan before you approach your lender, it’s sure to help convince them that their dollars are safe with you.
Angel investors and venture capitalists
Angel investors and venture capitalists often represent an ideal investment channel for your business, they are usually wealthy, well connected and highly successful, and are likely to generate media interest in your venture.
These individuals usually take an equity stake in your business in return for a cash investment and you use this funding to accelerate your growth.
This might sound like an appealing arrangement, but it’s not always so easy to secure. The trick to landing a venture capitalist is convincing them of your profitability.
You need to prove that your business is a winner by clearly detailing your value proposition and your projections for future growth. It helps to put yourself in the angel’s shoes, if you wouldn’t invest in you, why would they?
Family and friends
If mixing business and pleasure is risky then this goes twofold for friends and family. Although a generous offer from a family or friend might seem like the answer to your prayers, if you incur a loss be prepared to incur their wrath.
Professionalism is central to effectively navigating this investment channel. Clearly outline a payment plan, keep them informed of developments in your business and always ensure that they receive their returns on investment within set timelines.
It might sound conventional, but crowdsourcing and other customer-focused funding models are starting to take off in the United States and are increasingly viewed as a viable form of investment. The growth of US-based Kickstarter is testament to this.
The key to crowdsourcing success is building a community around your brand and making sure that your service proposition resonates with the market you’re trying to attract. It’s not for everyone, but it could be your ticket to investment success.