Should Your Contracting Business Look for Private Investors?

Saving up to start a business is hard. You may need tens of thousands of dollars or more to get started, depending on the field you choose. When you think about those numbers, it’s tempting to look for a private investor. Consider these factors to help you make the right choice for your business.

Investors vs. Business Loans
As you’re researching ways to fund your business, it’s important to distinguish between investors and business loans. When you get a business loan, you pay a set interest rate over a period of time until the loan is paid off. The loan might have a fixed rate and a set term or a flexible line of credit. Your ability to get the loan depends on your creditworthiness and any unique risks that your business presents.

Money from private investors is different. Instead of repaying an investment, investors expect to share a portion of your company’s profitability. Investors select companies to invest in based on a high likelihood that you will do well. This arrangement may affect the way that you run your business.

There Are Different Types of Private Investors
Fundamentally, there are a couple of ways that you can accept an investment from a private investor. Angel investors are single individuals who typically have vast amounts of funding available to contribute to a new business. You can expect them to have lots of experience that they may be willing to share. By comparison, many investors pool their funds and select a company in which to invest. There may be more money available in this format, but you can expect more rules to go along with it. Keep in mind that even though private investment may feel as simple as getting contributions from family and friends, investors usually have higher expectations for the way that you use the money.

Investors May Have Decision-Making Power
As a general rule, investors retain some level of decision-making power over the business. It’s typically limited to the amount of investment in the company. For example, if you accept an investment of 25% of the funds you need to start your business, you can anticipate an investor wanting a minority role in company decisions. The way that this works depends on the type of investor and the level of investment. If you take funds from an investment firm, they may stipulate that you hire a board of directors and designate one member to represent the investors. Angel investors may play a more hands-on role, but it depends on their expertise and interest.

You’ll Have Additional Responsibilities to Investors
In exchange for the money, you’ll have increased responsibilities to your investors. For example, you’ll need to make regular reports of your company profits and losses available to your investors. If investors don’t have a day-to-day role in your business, you may need to meet with them individually or with a designated representative to provide updates and receive input on the future of the company. Typically, these guidelines will be stipulated in the agreement that you sign with the investors at the time you accept the funding. This underscores the importance of ensuring that you understand any agreement before you commit to it.

You’ll Need a Professional to Help You Make Decisions
As with any other professional financial transaction, it’s a good idea to bring in experts who can help you evaluate your options and make a decision. You wouldn’t accept a loan without reading the fine print, and you should definitely take your time to evaluate any offer before agreeing to it. It’s worth hiring a lawyer to look over the terms of the contract and point out any stipulations that may be difficult for you to manage. It may also be wise to run the details past an accountant so that you understand the benefits you could receive from the funds, as well as your financial responsibilities to your investors as a result.

Building a fund so that you can run a contracting business takes time, and you may need help from other sources. To start on the road toward your contracting career, visit CSLS today!