The Microloan program provides loans up to $50,000 to help small businesses and certain not-for-profit childcare centers start up and expand. The average microloan is about $13,000.You may also be required to provide projected financial statements either as part of, or separate from your business plan. It is a good idea to have these prepared and ready in case a program for which you are applying requires these documents to be submitted individual.
Microloans can be used for:
- Working capital
- Inventory or supplies
- Furniture or fixtures
- Machinery or equipment
Each intermediary lender has its own lending and credit requirements. Generally, intermediaries require some type of collateral as well as the personal guarantee of the business owner.
Interest rates vary, depending on the intermediary lender and costs to the intermediary from the U.S. Treasury. Generally, these rates will be between 8 and 13 percent.
Microloans are available through certain nonprofit, community-based organizations that are experienced in lending and business management assistance. If you apply for SBA microloan financing, you may be required to fulfill training or planning requirements before your loan application is considered. This business training is designed to help you launch or expand your business.
Venture capital is a type of equity financing that addresses the funding needs of entrepreneurial companies that for reasons of size, assets, and stage of development cannot seek capital from more traditional sources, such as public markets and banks. Venture capital investments are generally made as cash in exchange for shares and an active role in the invested company.
Venture capital differs from traditional financing sources in that venture capital typically:
Focuses on young, high-growth companies
Invests equity capital, rather than debt
Takes higher risks in exchange for potential higher returns
Has a longer investment horizon than traditional financing
Actively monitors portfolio companies via board participation, strategic marketing, governance, and capital structure.
Venture capital is also an active rather than passive form of financing. These investors seek to add value, in addition to capital, to the companies in which they invest in an effort to help them grow and achieve a greater return on the investment. This requires active involvement; almost all venture capitalists will, at a minimum, want a seat on the board of directors.
Although investors are committed to a company for the long haul, that does not mean indefinitely. The primary objective of equity investors is to achieve a superior rate of return through the eventual and timely disposal of investments.
Business “angels” are high net worth individual investors who seek high returns through private investments in start-up companies. Private investors generally are a diverse and dispersed population who made their wealth through a variety of sources. But the typical business angels are often former entrepreneurs or executives who cashed out and retired early from ventures that they started and grew into successful businesses.
These self-made investors share many common characteristics:
They seek companies with high growth potentials, strong management teams, and solid business plans to aid the angels in assessing the company’s value. (Many seed or start ups may not have a fully developed management team, but have identified key positions.)
They typically invest in ventures involved in industries or technologies with which they are personally familiar.
They often co-invest with trusted friends and business associates. In these situations, there is usually one influential lead investor (“archangel”) those judgment is trusted by the rest of the group of angels.
Because of their business experience, many angels invest more than their money. They also seek active involvement in the business, such as consulting and mentoring the entrepreneur. They often take bigger risks or accept lower rewards when they are attracted to the non-financial characteristics of an entrepreneur’s proposal.
The Venture Capital Process
Submit Business Plan. The venture fund reviews an entrepreneur’s business plan, and talks to the business if it meets the fund’s investment criteria. Most funds concentrate on an industry, geographic area, and/or stage of development (e.g., Start-up/Seed, Early, Expansion, and Later).
Due Diligence. If the venture fund is interested in the prospective investment, it performs due diligence on the small business, including looking in great detail at the company’s management team, market, products and services, operating history, corporate governance documents, and financial statements. This step can include developing a term sheet describing the terms and conditions under which the fund would make an investment.
Investment. If at the completion of due diligence the venture fund remains interested, an investment is made in the company in exchange for some of its equity and/or debt. The terms of an investment are usually based on company performance, which help provide benefits to the small business while minimizing risks for the venture fund.
Execution with VC Support. Once a venture fund has invested, it becomes actively involved in the company. Venture funds normally do not make their entire investment in a company at once, but in “rounds.” As the company meets previously-agreed milestones, further rounds of financing are made available, with adjustments in price as the company executes its plan.
Exit. While venture funds have longer investment horizons than traditional financing sources, they clearly expect to “exit” the company (on average, four to six years after an initial investment), which is generally how they make money. Exits are normally performed via mergers, acquisitions, and IPOs (Initial Public Offerings). In many cases, venture funds will help the company exit through their business networks and experience.
Searching for Leaders
Federal, state and local governments offer a wide range of financing programs to help small businesses start and grow their operations. These programs include low-interest loans, venture capital, and scientific and economic development grants.