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BANK LOAN VS VENTURE CAPITAL

Bank Loan VS Venture Capital

Before you choose whether to go get a bank loan or seek for a VCs, let’s make a quick comparison on both bank loan and venture capital. Bank loan require an APR which stands for Annual percentage rate. This is an interest rate quoted by bank in their loan document. On the other hand VCs doesn’t have one, which is equity while bank is debt. The APR for small business will depend on the length of time the company has been operating, the revenue, operating profit, net profit. Consistency makes the numbers more predictable and the bankers more confident they’ll be repaid. That, of course, assumes that the market and industry are relatively stable. So bankers seek a guaranteed return on their investment (loan) in a business. Venture Capital however it’s a win or lose proposition. The either make a return because the business is successful and is later sold or it will go to the public, or they don’t because the business goes bankrupt or it shut down. VCs measure their returns as a function of the company’s future performance. Unlike in bank loan either the term or the repayment amount is known in advance.

The benefit on bank loan is that as you pay down your loan you build creditworthiness. This makes you more attractive to lenders and increases your chances of negotiating favorable loan terms in the future. While VCs can be passive or active, passive investor are willing to give you capital but will play little or no part in running the company, while active investors expect to be heavily involved in the company’s operations. Carefully consider whether or not you are compatible, as this person will own a portion of your business.

One of the most important tools when deciding on what type of business loan your company needs is research. Researching the different types of loans available to you and your company can save you money. Business loans are hard to get, but with the right combination of perseverance, passion, dedication, and conviction in your business plan, they are not impossible after all.

More detailed information and useful advice can be found at http://www.funded.com/ Created by Mark Favre, it offers expertise and assistance with developing and funding your concept, including a private forum for queries and discussions. If you need access to investors and funding providers, please do check out http://www.funded.com/.

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Meeting the Expectations of Venture Capitalists

Entrepreneurs seeking venture capital often approach the market a bit naively. Though there are similarities to applying for funding through traditional lenders, there are also some differences. For example, venture capitalists can set any terms they want whether they fit traditional funding models or not. For example, a bank may require returns that are 5 times within a 5 year period. The venture capitalist may require 8 to 10 times within that same time period.

Successfully obtaining venture capital requires being fully prepared to meet the special demands of venture capitalists. Since these are private lenders, they can set the bar high in order to lower risks. The venture capitalist wants to know if you are going to make money, how long it will take to see investment returns, what kind of track record or related experience you have, and whether the company management team is competent, innovative and forward thinking.

If you can answer these questions successfully, there’s a good chance you will attract funding. However, matching the company with the right investor is critical. Term sheets detail the proposed agreements and at this stage it is critical that each side ask the right questions, come to a full understanding of expectations, and agree to valuation. There should not be any major surprises during the final negotiations once the term sheets are agreed upon.

Keep Your Deal Sweet and Not Sour

As odd as it may sound, you can select the wrong venture capitalist if you do not clearly explain your business model in terms of how you plan on operating and what your long term goals are for success. It’s not a matter of fabrication, but more a matter of clear communication. A deal can go sour really fast if the venture capitalist discovers during final negotiations that the company management really plans on taking a different growth path than was explained or has plans that were not divulged and could potentially adversely impact operations.

Viewing End Goals Through Valuation

If this seems obvious then you would be surprised how many negotiations fall apart even after terms sheets have been agreed upon. One of the main areas of contention is business valuation. Business valuation is normally figured by determining the discounted cash flow and then adding the residual value of the business. The projected cash flow will extend to the end of the agreement because that is the period in which the venture capital funders expect to get their money back.

Of surprise to many businesses applying for venture capital is the fact the venture capitalists will value their business much lower than the business believes is accurate. However, the venture capitalist viewpoint is one of minimizing risk and earning a profit while a business is anticipating growth and profits and is willing to take risks to achieve their goals. The business and the venture capitalist have the same end goals but will approach valuation differently while deciding if it is possible to reach those goals. Want more info or assistance? Visit http://www.funded.com

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In The Eyes of an Angel Investor

One of the best ways to prepare for a search for startup funding by angel investors is to pretend you are one.  Investors have money they are willing to put into new enterprises, but they also want to minimize their risk as much as possible even with the understanding there is always a certain higher risk associated with a new business. If you consider what you would require if you were investing personal funds, the element of risk becomes much clearer and you can hone in on what information you need to assemble to prove your venture is a good investment.

The truth is that funding requests in the form of business plans submitted to any type of investor, whether for venture capital or to equity partners or to angel investors, should focus on answering questions before they are even asked. So it only makes sense to ask yourself the questions first as if you are investing your own funds.

It can be difficult to look at a new business with an objective eye when you are excited about a new idea, and it’s your business under the microscope.  Looking at the proposal from the angel investor’s viewpoint can help you keep your proposal targeted on the ultimate goal which is new funding.

Question: Am I It?

In the eyes (and mind) of an angel investor approached about a potential investment, your new business is untested.  The initial questions that will arise include:

  • What other potential sources of business funding is available to the new enterprise?
  • Could the startup business find funding through more traditional sources like business loans?
  • How long has the entrepreneur been looking for funding and is there any interest in the project by other investors?
  • Is it possible that several angel investments could be pooled to establish business funding while spreading the risk?
  • Is the entrepreneur asking for funding able to prove that he/she is a legitimate requestor with a solid business plan and not simply an “idea” person who has trouble following through?

These types of questions are just the beginning of a detailed analyzation process. Angel investors considering startup funding will want comprehensive information about projected income and expenses, marketing, project team members, business organization, a SWOT analysis, management, legal matters, future capital needs and more.

Question: Is Break Even in the Picture Anytime Soon?

One of the reasons some entrepreneurs are unable to attract any type of investment including venture capital, equity partners or angel investors is because they have not looked past the initial startup. Lack of capital is one of the main reasons small businesses fail according to the Small Business Administration. In the excitement of bringing a new business idea to the marketplace, the details are overlooked like when will the business break even?

Question: Do You Have Answers Prepared

Pretend you are the investor as you prepare your business plan including the financial section. What would you expect to get answers to before approving any investments or business loans? If your business plan doesn’t answer those questions about your venture then angel investors are going to see the proposal as too risky before it even gets off the ground.

More detailed information and useful advice can be found at http://www.funded.com . Created by Mark Favre, it offers expertise and assistance with developing and funding your concept, including a private forum for queries and discussions. If you need to access a vast network of business people, entrepreneurs, partners and service providers to help you start, finance and run your business, check out http://www.funded.com.