Small Business Financing: VC's and Banks

Looking for money to start or support your small business?

Avoid one of the biggest, and most common, mistakes -- don't ask the right people for the wrong kind of financing.

There are several categories of small-business funders, including small-scale venture capitalists, "angels," banks, factors, and "irrational investors." It is very important to present potential funders the right kind of proposals. Don't make a pitch for venture capital from a bank, for example, and don't ask a factor for the kind of generous terms that an irrational investor will offer.

Here is what you need to know about venture capitalists who work with small businesses, and banks. Each category of lender looks for very different kinds of proposals from businesses, and each expects a very different kind of payoff:

• Small-scale venture capitalists are likely to back your business because they believe in you personally, and in the business opportunity you have identified. They are motivated by the personal track records of the principals in your business, and by the timeliness of your business concept. If you haven't led a business before, don't expect help from a venture capitalist. Expect venture capitalists to seek a substantial amount of the equity in your company in exchange for their backing, and expect them to demand a great deal of accountability for how you spend their money. Venture capitalists generally expect their investments to pay out when your company goes public, or undertakes a future round of financing.
   
• Banks tend to back small businesses in order to help them rationalize cash-flow. To justify loans to small businesses, banks like to see a track-record of profitable operation of your business, and assets that can secure your loan. In most cases, you'll need outstanding receivables or business property with clear equity value to secure a bank loan. However, many banks today have more adventurous lending programs for small businesses, and the criteria for lending are often quite flexible. Expect to be asked to guarantee any bank small business loan personally. Banks almost always expect their return in the form of loan repayment, and do not take any equity stakes in small businesses.
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