What are the pros and cons of using private investors to fund your small business?

1 Pros of using private investors

One of the main advantages of using private investors is that they can offer you more money than traditional lenders, such as banks or credit unions. This can help you scale up your business faster, enter new markets, or launch new products. Private investors may also bring valuable expertise, connections, and mentorship to your business, especially if they have experience in your industry or niche. They can help you refine your strategy, access new opportunities, or solve problems. Furthermore, private investors may be more willing to take risks and support innovative or disruptive ideas than conventional financiers, who may have stricter criteria and regulations.

2 Cons of using private investors

On the other hand, using private investors also has some drawbacks that you should consider. One of the main challenges is that you will have to give up some control and ownership of your business to your investors. This means that you may have to share your profits, report your performance, or consult them on major decisions. Depending on the terms of the deal, you may also face pressure to meet certain milestones, targets, or expectations from your investors, which could affect your vision, culture, or values. Additionally, finding and attracting private investors can be time-consuming, competitive, and costly. You will have to prepare a compelling pitch, negotiate the valuation and terms, and comply with legal and financial requirements.

4 How to manage your relationship with private investors

Once you secure funding from private investors, it's essential to maintain a positive and professional relationship with them. Regularly communicate with your investors, updating them on your progress, achievements, challenges, and plans. Be honest and realistic about your performance and seek feedback when needed. Additionally, ensure that you deliver on your promises and expectations - show them you are using their money wisely and effectively, achieving milestones, targets, and goals. Don't forget to appreciate and acknowledge your investors - thank them for their support, trust, and contribution to your business. Celebrate successes and milestones together, and reward them for their loyalty and partnership. This will demonstrate your growth, impact, and potential while also leveraging their input, expertise, and network to improve your business.

5 How to exit from private investors

At some point, it may be necessary to exit the relationship between you and your investors, either partially or completely. This could be due to a successful outcome, such as an acquisition, an IPO, or a buyout, or because of a problem, such as a disagreement, a dispute, or a failure. In either case, it is important to plan and prepare for the exit strategy and execute it in a respectful manner. When exiting private investors, you should review the agreement and terms of both parties regarding the exit, communicate and negotiate your exit intention and rationale diplomatically, and execute and finalize the legal and financial transactions involved. Additionally, you should ensure a smooth transition and handover of the business or shares, as well as end the relationship on a positive note.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?