Private Investor vs Loan: Identifying the Needs of Your Startup

A private investor loan may be away for a start-up business to acquire the necessary capital to get the business started. A borrower’s situation will determine the best type of financing for their business. There are a few to choose from, each with it's own set of criteria.

Private Investor Types

A private investor can consist of an angel investor, venture capitalist or other individual who invest in new technologies and ideals. Through the use of a business plan, these investors determine the viability of a company and whether it makes sense to provide investment capital in order to assist with the company’s start-up.

A business entrepreneur with an invention or ideal can seek the assistance of private investors in order to find sources of funding for the company. Angel investors and venture capitalists look for the future profitability of the project as a way to receive a return on the upfront capital they invest. They take a risk that the company may not become profitable, based on the projected financial information, but are willing take that risk based on their own analysis of the ventures viability.

Private Investor’s Involvement with the Business

Angel investors and venture capitalists tend to shy away from the direct management or day-to-day operation of the business. Their interest is the profit results of the company and the ability to deliver returns as stated in the loan agreement. The loan agreement is executed between the investor and the business entrepreneur. It is typically best for the investor to take a hands-off approach to the business venture, similar to regular banking institutions and other lenders that provide business loans.

Banks and Other Lenders

Banks and other lenders tend to have more lending stringent requirements for businesses, particularly start-up businesses. These requirements may include a collateral or other security requirement for the loan or may be that the business owner provides a pledge of their personal assets or creditworthiness in order to establish the loan. A bank or other lender may require a business plan as well as detailed financial projections that are necessary to show the business savvy of the borrower. These documents are part of the due diligence and underwriting requirements necessary to make the loan.

The entrepreneur should look to both private investors and banks and other lenders as a potential financing source for their business. Although they have different lending requirements, these types of finance opportunities may be used together in order to come up with the necessary amount of start-up funding for the business entrepreneur.