All businesses old and new need financial help. Whether it’s a loan, cash advance or help from an investor. A business investor can join and ease the financial burden by providing backing and experience while you focus on running your business.
What is Investing?
Investing is when a group or an individual puts money into a business for financial gain or return. The main aim of an investor is to maximise profit while minimising risk. Some investors do not ask for profit but will invest in a company in exchange for part ownership of the company.
Types of Investors
There are three distinct investor categories: Pre-investors, passive investors, and active investors. From these three categories, you get other types of investors such as angel investors and venture capitalists amongst many others.
1. Angel Investors
Angel investors fall under passive investing. They invest in small businesses, in exchange for ownership equity (the amount of money the owner of an asset would be paid after selling it and any debts associated with the asset were paid off) in the company. In South Africa, there are many angel investors such as the South African Angel Investment Network.
2. Venture Capitalists
Venture capitalists are active investors that provide capital to companies with high growth potential. They usually invest in startups or small businesses. In South Africa, we have venture capitalist firms like Kgatelopele Venture Capital and Private Equity.
3. Peer-to-Peer
Peer-to-peer (P2P) investors are family or friends who give money to help start your business. P2P platforms in South Africa include Swoop Funding and Funder Jet. P2P investors also fall under the category of crowdfunding.
4. Personal Investors
Personal investors are passive investors who invest their own capital. They usually invest to gain a high return. The Johannesburg Angel Investor Network (JoziAngels) is a platform for personal investors.
5. Institutional Investors
These are usually companies that invest money on behalf of clients. Mutual funds, pensions, and insurance companies are examples. South Africa has many platforms for institutional investors like Foord South Africa and Allan Gray.
From this list, you can see that there are many types of investors, and which ones would suit your business best according to the kind of investment you are looking for.
We will now delve into the advantages and disadvantages of having an investor put money into your small business or startup.
Benefits of Investors
Access to funds is an important aspect of starting a business. One of the advantages of getting an investor is cash flow. Cash flow availability means that you have money coming in and out of the company. This also helps with the liquidity status of your business.
Secondly, an investor comes with expertise and connections. An important part of business is knowing the right people who can bring years of experience and a large network to you. This can open a lot more investment opportunities and access to more capital.
Fast growth is one of the advantages of having an investor, because of the capital and experience that an investor has, you can expect accelerated growth for your business. Having someone who believes in your business plans can lead to long-term success and scaling.
Disadvantages of Investors
Although the benefits of getting an investor are good, it is necessary to realise that there are a few disadvantages. One of them is having less control over your business. They can hire, fire and control how the business operates.
Having an investor, whether directly involved or not, does not mean you will be under pressure to make a profit quickly. An active investor will want to receive regular updates on business performance and profits. They might also want to be directly involved in who you hire and how the business operates.
Lastly, having an investor also means you have less profit to take home and re-invest in your business. If an investor requires a share of your equity, or payment with interest over a certain period, you will have to pay them back.
By looking at these pros and cons, you can see if an investor is the best way to get funding for your small business. Remember, there are many other ways to get funding such as loans, government grants and cash advances.
If you need more information on the different types of funding for your SME or startup, visit the SME South Africa funding page or book an appointment with one of our funding experts.
