Boosting Your Business: Leveraging Investor Money for Small Business Growth
Cash flow is often the only thing standing between an entrepreneur and their startup or a small business and its growth. Attracting investors is one way to bridge that gap, and it comes with many benefits—but accepting money from investors also presents challenges. The good news is that with knowledge of the potential downsides comes the power to protect your business and mitigate your risks.
PROS: BENEFITS OF ATTRACTING INVESTORS
The pros of accepting money from investors go beyond the cash flow infused into your business. From word-of-mouth marketing to expertise, the benefits of financing through investor relationships can create a sustainable flywheel of growth momentum.
1. Access to more resources
Launching a startup or implementing a new business strategy can be exciting. But the success stories sometimes leave out the amount of financing entrepreneurs need to feed the beast. Accepting money from investors is one way to speed up cash flow. This allows you access to more resources for operations or growth strategies without having to take out a bank loan, cash advance, or tap into your personal savings or credit cards.
2. Shared RISK with your investors
When working with investors, it can be comforting to know that the financial burden is shared; in other words, you're not the only one with money on the line. Keep in mind that some investors will require a set repayment schedule (similar to a business loan), while others are willing to take a portion of your business' profit over the long term. Regardless of the repayment type, investors inherently have a shared interest in seeing your business grow and succeed.
3. ADDITIONAL EXPERTISE and guidance
More often than not, those who are willing to invest in your company have business and financial expertise themselves. Besides money, investors can bring a wealth of knowledge and contacts to the table that you can tap into for advice and guidance. When considering potential investors, look beyond their bank accounts and ask about other ways they may be able to help your company level up.
4. More champions for your brand and business
Investors have a vested interest in seeing your business thrive—the return on their investment hinges on it. Because of this driver, they have the potential to become natural brand ambassadors in helping to promote your business directly or indirectly.
For example, they may know other people who would be interested in investing or be able to drive leads to your company. Indirectly, they may engage with your brand on social media or talk about your business within their own network.
CONS: DOWNSIDES OF INVESTOR FINANCING
Most of the cons of accepting money from investors can be avoided with some due diligence on your part. The time you spend setting up the relationship for success with a clear plan before taking any money can save you a tremendous amount of angst (or even worse) in the long run.
1. LOSS OF (SOME) CONTROL
Many investors will expect to have a say in your business or even an equity share in exchange for the influx of capital they provide. This isn't true for other types of financing, like bank loans or lines of credit, for example, so it's something to consider carefully before bringing investors into your business. Decide ahead of time where you are willing to cede control (and where you are not), and make sure the terms and conditions are clearly defined.
2. Potential for UNREALISTIC EXPECTATIONS
Unless otherwise specified, investments are not gifts. They come with the expectation of a return on investment (ROI). If your investors have unrealistic expectations about how quickly they will be repaid or the timing and the amount of financial returns, it can create a lot of stress or even put your business into a financial and legal bind.
To mitigate this risk, lay out a clear plan with investors about how the money will be used, what results you expect to achieve, and when. You should also consider (and discuss) whether initial returns could be reinvested back into the business, as well as what portion will go back to investors.
When creating your timeline, be sure to allow for contingencies. This way, if there's a delay in a process (such as installing new equipment to expand operations) that impacts related revenue, you can still meet expectations.
3. Potential CROSSED BOUNDARIES
The same enthusiasm that makes investors willing to share their advice, expertise, and money may also give them a sense of entitlement. In turn, they may cross the boundaries of what type of say and control they have in how your business is run. When this happens, it's often stressful. It can cause hurt feelings, arguments, and even broken relationships.
To avoid this dilemma, create a “job description" for your investors that outlines their responsibilities and provides a conduit for them to provide input. It should also clearly state that areas outside of those boundaries remain in your purview.
4. Too many STRINGS ATTACHED
Even with clearly defined expectations and roles, accepting money from investors often comes with strings attached. This could be anything from reporting requirements to investors being on your board, or even coming into the company as an officer or employee. No matter how tempting the money is, depending on the conditions, this type of investor might not be suitable for your business.
What's important here is for you to determine whether the demands an investor makes are conditions that you can live with and whether they are right for your business strategy. For example, if a potential investor would not be someone you would normally hire or their role won't help your company grow, accepting their money on the condition that they get to take on an active role in running your business is not advisable.
Knowledge is power
By fully understanding the pros and cons of accepting money from investors, you can avoid the pitfalls and maximize the benefits for your small business. It's also good to get a second set of eyes on any arrangements you make. Some of the pros and cons of working with investors make it advisable to get legal counsel and help in setting up formal contracts, writing terms and conditions, and so on.