Preparing for Entrepreneurship – Establishing Operating Capital for Business Longevity – Week 5

Does everybody wish on occasion that they had a guardian angel? Someone who is looking out for your best interest and can provide assistance when needed? As a business owner, you may need this assistance at various times, because of the unpredictability of entrepreneurship. Enter the angel investor…

Week 5: Angel Investors

Angel investors, also known as business angels or informal investors, are people who provide financial backing for small business startups and entrepreneurs.  Recently, they have begun to organize themselves into groups known as angel groups or angel networks, in the interest of sharing research and information.  They differ from other types of lending resources in that they generally invest using their own funds. They tend to be less personal than peer-to-peer lending, more professional than having family or friends providing seed money, and more intimate than banks or other financial institutions. describes angel investors as “usually investing in the person rather than the viability of the business. They are focused on helping the business succeed, rather than reaping a huge profit from their investment. Angel investors are essentially the exact opposite of a venture capitalist.

The pros to angel investing is that, if your proposal interests them, then your opportunities can be fully recognized in a very short amount of time.  Another is that they are typically willing to accept risk and demand little or no control in return for the chance to own a piece of a business that may be valuable someday.  Angel investors,
however, require a high amount of return on their investment, as such an investment is deemed to be high risk; if your business fails to make a profit, or just out and out fails, they lose their investment.

Wikipedia cites the Kauffman Foundation, saying “professional angel investors seek investments that have the potential to return at least 10 or more times their original investment within 5 years, through a defined exit strategy, such as plans for an initial public offering or an acquisition.”  Even though it’s a potentially expensive resource,
the depressing fact is that it’s incredibly difficult for a young business venture to qualify for a cheaper venue, such as bank financing or traditional loans.

Below are some great resources for beginning your search for a genuine angel investor: has its own directory for angel investors, as well as a comprehensive guide to finding one:

Angel Investors of Chicago
Angel Investors of Chicago is a local resource for finding (what else?) angel investors located in Chicago.  Their page describes them as “an alliance of highly experienced developers and investors dedicated to providing capital to early and mid-stage entrepreneurial companies.” is one of the more widely recognized resources for finding angel investors; they pride themselves on “professional investor relations, from pitch to exit.”

Have you had experience with angel investors? Have you searched for them before?  Were you successful?  What was the most helpful piece of information that you found in researching angel investors?

Preparing for Entrepreneurship – Establishing Operating Capital for Business Longevity – Week 4

One of the places small business owners and entrepreneurs have learned to be most wary of is traditional financial institutions; namely, banks.  However, a not-so-traditional version of a traditional financial institution has become one of the champions of small businesses: community banks.

Week 4: Community Banking

If customer service, local benefits and a surprising lack of underhanded hidden fees is important to you (not to mention a drastically higher approval rating for small business loans), then community banking is definitely worth considering. A simple definition of a community bank is one that is locally owned and rooted in a particular community, and that has less than $1 billion in assets.

As opposed to megabanks, community banks often offer genuine benefits without providing many restrictions to enjoy these benefits. For example, if a community bank offers one hundred dollars to you when you open a checking account with them, it usually happens just like that, no need to keep open multiple accounts or already have an existing, or a minimum deposit of $250, nor hidden maintenance fees for the simple pleasure of keeping your money safe for you. Community banks tend to make it more their mission to help you with your money, as opposed to trying to separate you from it.

Community banks have numerous advantages to both the individual and the small business when compared to larger corporate banks and franchises.  Generally, community banks will take into account a broader range of qualifications other than just your credit and current backing, such as character, family history and discretionary spending when making loans. Because they are smaller, community banks have a more intimate relationship with the businesses they work with, and are able to renegotiate as they grow; their flexibility is a quality that makes them highly prized as a resource.

One might wonder why community banks decide to stay as altruistic as they do if it means staying smaller and seemingly unambitious. Community banks do, in fact, have ambitions; they simply differ from the ambitions of mega-banks. Community banks (their name being a dead give-away) invest heavily in their community, and thrive when their community thrives.  It is a personal experience highly underrated by the majority, but appreciated by anyone in need of alternate resources. Additionally, community banks are in themselves small businesses, and small businesses need to look out for each other — thus making it in their best interest to aid local entrepreneurs.  They make it their business to assist, as they understand and empathize with the needs and concerns of soon-to-be small business owners.

Since a community bank is also a local business heavily involved in the community, they know the needs of said community and the logistics of the area. This is invaluable information for any prospective small business owner.

Check out this recent report from the Aite Group on the benefits of community banking and how to optimize your interactions with your local banks:

Do you bank with your community bank?  How is your relationship with them, as opposed to megabanks?  Have you considered looking into their loan process?

Preparing for Entrepreneurship – Establishing Operating Capital for Business Longevity – Week 3

Everyone knows that starting your own business is not a piece of cake, and sometimes, the pinch at the beginning happens again in the middle of your business’ existence, and again at another point in the future. What isn’t always discussed is ways to get through these rough patches.

Week 3: Accounts Receivable Factoring

This week’s topic, accounts receivable factoring, (also known as factoring, or invoice factoring) is one of the more complicated topics to understand, but is a very useful tool for up-and-coming entrepreneurs.  Basically, it is the selling of the business’ accounts receivable to a third party, known as a factoring company, at a discount.

It’s time to brush up on some accounting terminology – accounts receivable is money owed to a business by its clients; an account of money owed to you.  So in laymen’s terms, it’s selling your IOUs.  If your business is short on cash and in need of an immediate infusion, it’s a highly viable option for getting yourself out of a pinch.

Happily, accounts receivable factoring companies are specifically set up to deal with these types of transactions and help you through a rough patch. The key to success with accounts receivable factoring is to select the right business partner with whom to work.  It is usually better to go with a company that is well established, has stood the test of time and one that has expertise in the specific industry your business is in. says “With the amount of complexity and nuances involved in various industries, teaming up with a partner who understands what you do will usually turn out better for your business. Ask the accounts receivable factoring company you are evaluating if they have a client similar to you in their portfolio. If you are a retail business, ask if they have other retail clients. Industry experience is a key factor in determining your success with factoring.”  Keep in mind though, the age of the receivables has a significant effect on the amount the company receives; the older the receivables, the less the company can expect.

Have you ever looked into selling your accounts receivable?  What information did you come into when searching?  Did it seem like a good investment?

Preparing for Entrepreneurship – Establishing Operating Capital for Business Longevity – Week 2

In today’s financial climate, we as Americans have put aside the age-old adage of “Neither a borrower nor a lender be,” preferring instead to make the most out of our opportunities – and when there are none directly in front of us, preferring to create our own opportunities.  In case you missed last week’s blog, this month’s series focuses on alternative funding options for aspiring entrepreneurs; today’s, specifically, is on the recently developed peer-to-peer lending system.

Week 2: Peer-to-Peer Lending

Peer-to-peer lending, or social lending, removes the traditional financial institution from the lending process (known as disintermediation) and directly connects people who need money with people who have money to invest.  The loan works as a traditional loan, with a set interest rate and a period of repayment, so peer-to-peer lending from an investor’s standpoint is considered a for-profit activity, but with a greater amount of flexibility for both borrowers and lenders.

What differentiates peer-to-peer lending from other types (say, borrowing directly from a friend or family member) is the starring role the Internet plays – specifically, social networking.  The biggest assumption peer-to-peer lending works off of is that people will be less likely to default on their loans if there somehow exists a personal connection.  It’s a shrewd capitalization on a person’s innate sense of honor, magnified by personal connection, whether that connection is based off mutual community, existing personal relationships, mutual interest, or geography.

Arriving in the U.S. in 2006, peer-to-peer lending began picking up its pace in 2007, its main known advantage is its ability to lend out with minimal interest rates, usually under ten percent.  Unfortunately, that major point of attraction is beginning to gradually fade out with the sheer volume of people beginning to turn to this innovative lending method – making now the optimum time to use it if you’ve been considering it, before it fades into yet another financial institution little different from the ones already in existence.  The most well known peer-to-peer firms are Zopa, Prosper and Lending Club, all of which have undergone their fair share of both criticism and praise.  As a potential investor, one of the risks of offering your backing is put very eloquently in an article by Mark Gimein, business writer for the New York Times:  “ultimately a paradox of lending is that the people who are more likely to repay are those who don’t need the money.”

Have you found social lending to be practical?  Or is it more of an ideal?  What other alternative lending methods have you found to be successful?

Preparing for Entrepreneurship – Establishing Operating Capital for Business Longevity – Week 1

Welcome to the end of the year. It’s a time for celebration and reflection, a time to determine what went right and what could have gone better, and a time to make bold decisions to do something different.

When we ring in the new year, a number of individuals will decide that 2012 is the time when they will become an entrepreneur. Will you be part of this group? If so, you will want to establish operating capital to keep yourself in business for years to come. Most new entrepreneurs do not have a great deal of money to start out with, but there are a variety of ways you can generate funding for your venture. This month, we will review five options – microlending, peer-to-peer lending, accounts receivable factoring, community banks and angel investors.

Week 1: Microlending

As early as ten years ago, when business owners needed money to begin or expand their company, they filled out a quick application at their bank, sat down with the business development manager and received the funding in a couple of weeks. After the recession in 2008, some business owners no longer are “good risks” according to the criteria of the larger banks and lending institutions.

The answer to this shift in lending is called microlending (or microfinancing). Microloans traditionally go to those who are overlooked by traditional lenders: individuals with poor credit, individuals without substantial collateral and entrepreneurs who are breaking into an emerging field.

In the U.S., the microloan became a vital tool during the economic crisis that began in 2008. Under the banner of the Small Business Administration (SBA), the U.S. government stepped up funding of its microloan program to $50 million in 2009, an increase of $30 million over 2008, according to the U.S. Small Business Administration (SBA) website. These loans proved to be crucial aids for American small business owners in keeping their enterprises running during the recession.

Where can you apply for microloans? What are the criteria for receiving one? Visit the U.S. Small Business Administration website and select the Microloan Program tab – If your business were headquartered in the Chicagoland area, ACCION Chicago would be your best source for microloans.

Have you ever had to achieve a goal in a non-traditional manner? Did you appreciate the success more when you went about it by choosing Plan B versus Plan A?