Originally written by Matthew Cushen on Small Business
There are many different ways for a business to raise money. Unfortunately, seldom are any of them easy and it can be frustrating and disheartening. Understanding the broad rationale for different types of investors might save some of that effort and frustration.
Lenders are fixated on the probability that a loan will be paid back. This generally means seeing regular revenue, sufficient to cover principal and interest payments. They also seek security over some assets — either the business’s or, if they are not sufficient, through a personal guarantee from the founders. Their confidence in available revenue and the value of assets increases if there is a relationship that has bred some trust and where there is a credible financial history. Hence debt is only rarely an option for the newest businesses.
For equity investment there are very different aims and criteria. You may have family and friends, for whom the relationship will be as important as the returns and they might only have one venture investment. But for experienced angels, professional investors and venture capital firms that are investing other people’s money, the investment is likely one of many in a portfolio.
When considering a