Conventional fund sourcing has grown more challenging in recent years. Small and medium-sized businesses (SMBs) can only attract business investors if they leverage proven strategies.  

Traditional Funding Streams Are Drying Up

The Small Business Capital Formation Advisory Committee met recently to discuss alternative investment options for SMBs. Apparently, it discovered venture capital — the primary source of startup funding — was no longer meeting demand. 

Usually, venture capitalists only provide early financial support to small businesses with impressive growth curves. Unfortunately, uninterrupted revenue increases, expansion and lead generation are practically impossible — even established companies struggle in this respect.

In addition to the lack of investors, financing through banks has become more challenging. Additionally, many business owners report their friends and family do not have the means to provide support. Since traditional investments are drying up, the Small Business Capital Formation Advisory Committee admits alternatives are necessary.

SMBs seeking capital to support early-stage growth must find alternative funding. Additionally, they must identify factors that impact investors’ decision-making processes — the Committee suggests this is the only reliable way to find and attract them. 

Small Businesses Need to Source Funding Elsewhere 

Historically, small business owners have approached friends and family to secure funding. They have also often applied for loans at local banks and sought support from venture capitalists. Since these approaches are no longer reliable, they must use other strategies.

While many SMB owners dip into their savings and rely on monthly revenue to support their growing business, those strategies are unsustainable. After all, companies need an initial investment of $2-$5 million on average. In other words, securing reliable funding is essential.

Many entrepreneurs have no industry connections. As a result, finding and attracting business investors can be challenging. Fortunately, many proven strategies do not hinge on professional networks — the digital age makes it easier than ever to source funding. 

Proven Strategies for Finding a Business Investor 

SMB owners who have exhausted typical funding avenues can still find a business investor through alternative means.

1. Crowdfunding

The internet gives SMBs access to billions of potential investors. Since crowdfunding websites are specially designed to source funding, they are an ideal platform for early-stage growth. Moreover, the donations come with no strings attached — meaning business owners do not have to pay interest, hand over a stake in the company or allow oversight. 

2. Small Business Grants

The Small Business Administration has grants — money businesses do not have to repay — for qualifying SMBs. While its available funds surpassed $36.66 billion in 2023, it only spent $32.36 billion. It left 12% of its total budget untouched. 

While many SMB owners shy away from applying for grants because they feel they may not qualify, they leave money on the table. Clearly, the Small Business Administration has enough for everyone, considering it had $4.3 billion left over in 2023. 

3. Angel Investors

A business investor who invests their own money and is not associated with any company or fund is known as an angel investor. While they often want something in return — like a stake in the company or extensive oversight — they are more likely to take on a high-risk investment they feel passionate about. 

4. Private Community Investors 

Many people love to financially support something they feel passionate about. SMBs have an advantage in this respect because a small-town business investor is far more likely to help a local entrepreneur rather than a faraway startup. 

What Do These Investors Get in Return?

Some SMBs may be wary of sourcing their funding from non-standard investors. However, while crowdfunding and angel investors may seem less reliable than venture capitalists or financing through a bank, the Small Business Capital Formation Advisory Committee made it clear alternatives are necessary. 

It is still good business sense for SMBs to wonder what these alternative investors get in return. At most, they typically only ask for a stake in the company. Other common requests are performance updates or a unique role.

That being said, some may not want anything in return. For instance, many private community investors simply enjoy supporting local businesses. Additionally, crowdfunding platforms are voluntary, so people cannot ask for something in return for donations. 

Proven Strategies for Attracting a Business Investor 

The Small Business Capital Formation Advisory Committee’s speaker spoke about what prompts a business investor to offer funds in the early stages. The discussion highlighted strategies many SMBs overlook.

1. Show Longstanding Relationships

Having longstanding relationships demonstrates stability. As a result, a loyal customer base makes businesses appear more valuable to investors. If SMBs have long-term contracts, a subscription model or faithful clients, they should showcase them.

2. Prove Brand Differentiation 

When a business investor is deciding whether or not to provide their support, they want to know what the company offers that others don’t. In an oversaturated market, success is often determined by originality. SMBs that figure out how to differentiate their brand from the competition are more likely to attract investors.

3. Identify Business Trajectory  

SMBs must identify their company’s trajectory. How they plan to expand over time and adapt to change determines the return on investment. If they display knowledge and prove there is room for growth, they will attract investors. 

4. Present Performance Metrics

Most investors are more willing to offer support when they receive proof the SMB can hit their targets. Businesses can use metrics like customer acquisition cost, net profit margin, conversion rate and customer retention rate to demonstrate they have the capacity for long-term success.

5. Disclose Financial Goals

SMBs can attract backers by disclosing their financial goals upfront. In fact, communication enhances professional credibility and builds trust. A business investor will undoubtedly appreciate the transparency. 

6. Demonstrate Market Awareness

SMBs are more likely to attract investors if they prove they are knowledgeable of market trends, risks and competition. Strategically demonstrating business awareness shows people they are a low-risk, high-reward investment. 

A Quality Business Investor Only Seeks Stable SMBs

A company’s success relies on its ability to demonstrate stability. After all, all investors have one thing in common no matter where they come from — they all want a sure return on investment. They will be more willing to pour their money into something that looks great on paper.