When to Turn to a Venture Capitalist for a Small Business Loan

A Home Business Article Contributed by Elizabeth Fox-Wise

Will a Venture Capitalist Give Your Small Business a Loan?

Typically, a venture capitalist will not loan less than Five million dollars at a time to a small business. If you are looking for a loan that is smaller in size, a venture capitalist is not for you. Furthermore, a Venture Capitalist will only front a loan to a small business if they believe the small business has enough potential to allow the venture capitalist to pull out of the small business in three - five years. If you are looking for a loan with a longer term than five years, a venture capitalist is probably not for you.

If these loan restrictions meet your small business loan needs and youŽd like to get venture capitalists to take a look at your small business, there are things you should know first.

What do Venture Capitalists Look for When Giving a Small Business Loan?

Strong management - the first requirement of your business is a strong management team. Your management team must have relevant experience, drive, self-confidence and expertise.

A growing market - the next requirement is whether your small business is targeting a substantial and rapidly growing marketplace. Does your business have a good chance of successfully entering the market and obtaining a strong market position?

A unique product. Does your business have a proprietary or unique product? Does your product offer any benefits over similar products that already exist? Does it have patent or other proprietary protection to protect your market?

IPO candidate or acquisition target. Does your business have the potential to grow quickly, thus becoming an attractive acquisition target or IPO candidate? Venture capitalists are concerned about how they will liquidate from your business and receive good value for their investment.

Sound business plan - is your business strategy and business plan sound? All venture capitalists expect to see a well developed and coherent business plan.

Significant gross profit margins. Can your business' product or service generate significant gross profit margins (40 percent or more)? Large profit margins give a business more room for error and make the business more attractive for a possible IPO or acquisition.

"Home run" potential. Additionally, the venture capitalist wants to see the possibility of hitting a "home run" if he invests in your business. If your own business projections show only modest growth, or if the growth of the business is limited by technology or competitive factors, most venture capitalists wonŽt be interested. They want to finance the business that can grow to at least $25 million in sales within five years.

How to Prepare If You Want to Approach a Venture Capitalist for a Small Business Loan

Thoroughly Gather information. Find out about the different venture funds' strengths, reputations, and preferences for stage of business development. Make sure you are approaching the appropriate venture capitalist.

Prepare a well though out business plan

Get an introduction if possible. Venture capitalists are likely to be more receptive to a proposal referred by someone they know and respect.

Be prepared - Be prepared - Be prepared!