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Unconventional Home Business Financing Alternatives
By Kevin Erickson
While unconventional financing can cost you money in the long run, it does allow you to avoid borrowing money as a loan that needs to be paid back... whether or not your business makes a profit. With the alternative financing options presented here - if your business fails, your obligation to pay back the money expires. These alternatives, to heading down to your local bank or credit union for a personal loan, are venture capitalists and so-called "angel" investors. In both instances, you are asking individuals to invest their money in your business in exchange for a share of the profits.
Venture Capitalists
Venture capitalists provide money or capital to all types of start-up businesses but should only be considered if your home business concept is focused around technology and if you had access to better hardware it would allow you to make a bigger profit. Venture capitalists primarily look for businesses that have the potential to grow quickly and are run by an experienced and confident owner or management team.
Approaching a venture capitalist is similar to approaching a bank to ask for a loan, except you need to make a more convincing case. The venture capitalist you meet with will be a specialist in whatever industry you're planning to enter and they will turn and run faster than they can say hello and goodbye, if you don't convince them beyond a shadow of a doubt that you know exactly what you are doing. Research any venture capital company before you meet with them. Verify what they are looking for and who their existing clients are.
An important point to remember is that if they ever ask you to pay anything, you are being scammed, so be very wary of anyone who insists that they won't sign an NDA (non-disclosure agreement or privacy agreement) before they see your idea because they might hand it over to one of the companies they've already invested in.
Normally, venture capital funding is very competitive… so be prepared. The ideal situation is to build a solid version of your business on a small scale and then wait for them to come to you. You should also be aware that accepting venture capital funding will give the venture capitalists a significant say in how your company is run. They will try to force you to grow the company as large as possible but they will effectively take over your company. They may help you get rich but not much fun if you're out to start your own business to get away from the typical corporate way of life.
"Angel" Investors
Angel investors are similar to venture capitalists but on a much smaller scale. They are "real people" who will invest in smaller companies. For a home business, angel investors are a much better idea than venture capitalists.
Angels tend to behave more like a business partner. In many instances, they will invest half the required start-up funds and then take a personal role in the day-to-day running of the business. This contrasts dramatically with venture capitalists which have a tendency to be a more sterile, faceless entity and issue written demands if you're not making an acceptable profit. In addition to providing financing, most business angels also bring with them knowledge and experience which can be a great asset to your business.
On the other hand, you need to remember that they are in this for one reason and one reason only - to make a big profit. When you build your business with the help of an investing angel you need to be able to show them how you will be able to provide them with twice the money they put in and how soon. This doesn't necessarily mean that your business needs to grow rapidly, but it does mean that whatever you plan to spend "their money on" needs to be some kind of tool for making a big return over a relatively short period of time.
The Best Alternative - Staying Independent
Of course, the best way to stay completely independent is to avoid accepting any outside investment. However, if you really need the funding, there are still a few ways to take it and still stay relatively independent.
Regardless of the number of investors, make sure you retain control of at least 51% of your business… otherwise it's no longer your business. Remember, if you have a genuinely solid business plan, then the investors are the ones who should be begging you for the opportunity to invest for such a good return. If you ever feel like you're entering some kind of big overwhelming system that requires you to play by to many of other people's rules then don't. Last but not least, and I must stress that I would only go with this option as a last resort, you might be able to persuade your friends or family to provide the financing. Plus, you'll get far better terms and less intervention in the daily operation of your business.
About the Author
Kevin Erickson is a contributing writer for: http://www.work-at-homedepot.com and http://www.eyeonsubprime.com and http://www.total-forex.com. This article may be reproduced only in its entirety.
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