There are a variety of ways that a business can be financed by outside investors. All of them involve giving up some measure of control of the operation of the business, however. Make certain you have investigated any outside investment thoroughly and always have an attorney involved. For every successful investment there are at least as many, if not more, catastrophic investments. Venture carefully down this path.
The simplest form of investment is Equity Financing. This is similar to forming a partnership, in that the person or business who buys an interest in your business has a say in the future development of the business. The person or business simply buys a percentage of your business.
In a Merger, a business essentially is sold to another company. The business being sold usually loses its identity and becomes part of the other business.
The dream of many businesses seems to be to find an angel investor. Angels invest with the expectation of getting a substantial return on their investment. Venture capital firms are similar, but they typically invest between $250,000 and $20 million in exchange for equity. Angels invest smaller sums of money, although some investments have been as high as $1,000,000. Usually both angels and venture capital firms have a position on the board of directors and expect to have a substantial say in the functioning of the company.
A special kind of venture capital for small businesses are Small Business Investment Companies (SBIC). They are privately-owned and managed investment firms that are licensed and regulated by the Small Business Administration. SBICs provide venture capital and start-up financing to small businesses. In order to receive funding from an SBIC, companies must have a net worth of less than $6,000,000 and after tax profits of $2,000,000 or less for two years prior to their application.
The ultimate in outside investment is, of course, going public. Once again, take this step carefully. Not only does going public make you accountable on a much broader scale, it also involves providing a substantial number of financial reports publically.
