Investors
When you have a risky venture that appears to have the potential to grow dramatically (called Hyper-growth) but every bank feels that you are too high a loan risk, you can seek out business angels. Angels are successful small business people, professionals (lawyers, accountants and sometimes doctors) and occasionally high level big company executives who enjoy investing in new startups. These people can be found by talking with accountants and lawyers in your area. There are a few new web sites beginning to crop up that also try to match entrepreneurs with angels. Some metropolitan areas have "venture capital clubs" where entrepreneurs and angels can meet and look each other over. In our experience these clubs rarely work. They tend to be populated by lawyers, insurance agents and others looking to pick up traditional affluent clientele, while the few true entrepreneurs who attend complain that they cannot find any serious money people at these functions. Your best opportunity of finding angel capital is private networking.

Angels can offer you not only cash, but also advice and contacts. Often it is like purchasing a mentor for your business. Remember that they are also seeking a return that reflects the high risk involved. Usually the return can be from 15% to 40%, depending on how far you have taken the business on your own. Almost always, these types of people want to be cashed out in 3 to 5 years. The typical angel investment can range from $10,000 to $50,000.

Venture capital - often referred to by business owners as vulture capital - is a source of capital that is misunderstood by most small businesses. Venture capital usually steps in after the business owner has started the company on your own savings or credit cards, then squeezed the cash flow as tight as you could until the growth outstripped it, then obtained a bank loan, then sought angel investors to take the business to the next level. After all of these stages, venture capital firms will consider investing larger sums of money (usually in the $100,000 to $1,000,000 range) when the business has proven some real potential. Venture capitalists are still taking a big risk. Even when a company grows rapidly, there is a danger that the cash flow will not be able to keep up with the sales and operations, and thus the company may end up sold at a loss or driven out of business. Therefore venture capitalists look for around a 40% annual return on their money over the 5 year window of commitment they seek. Note that each round of financing will require you to surrender equity ownership. The venture capitalists will also want a substantial say on your board of directors, and may reserve the right to boot you out of your own company if it appears to them that you cannot manage it according to the business plan you showed them.

One neglected area of potential financing for small businesses is the cash flow benefits of partnering with a large company. For example, if you have a supplier who is a major company, you can approach them with the offer to more aggressively promote their product line and perhaps be a test site for one or two of their ideas. In return, the major company may extend more generous trade credit, provide contacts that lead to increased business, outsource to you an operational area that is troublesome or expensive for them, or even take a minority equity position in your business as a means of building a captive customer base. Certainly you should be careful not to let the larger company swallow up your firm. But with patient negotiations, this can be a new and low cost opportunity to gain additional working capital at a relatively lower cost.