Remember, the lenders maximum profit from the loan will be the interest he charges you. Since he wont participate in the profits, naturally he is going to be more concerned with security.

2. Equity Investments

An equity investor buys a portion of your business and becomes part owner. The equity investor shares in your profits when you succeed. Depending on the legal form of ownership, she only shares in your losses up to the amount of her initial investment. Put another way, most equity investors risk is limited to the money they put up, which can be lost if the business fails.

you will give it back. Your business plan should include a forecast of when and how that will happen. Failing to discuss a repayment strategy in your plan can cause a potential investor to wonder about your motives.

To understand a little more about your potential backers, lets look at the dilemma they face when they consider investing in a small business like yours. On one extreme are the very safe investments that produce a low profit. At the other extreme lie investments that promise a very high profit but that also carry a high risk of losing the entire investment.

Your new business proposal will be far less safe than an insured bank deposit. This means that to attract money, you must offer investors the possibility of fairly high returns. While investors will not classify your proposal as risky as casino gambling, the smart ones will know that, statistically, putting money into a new small business isnt a whole lot safer. In addition to the possibility of a big gain, investors will want to minimize their risks by looking for any security-enhancing feature your investment proposal offers, such as your skill at making businesses succeed or your business profitable track record.

You will want to offer investors the possibility of a good financial return, a sense of security and, if possible, a little more. Often, this is a vision of engaging in a business designed to enhance some particularly worthwhile objective such as health, education or environmental concerns. Or it can be simply an opportunity to help someone with enthusiasm and drive. One of the best ways to convince a potential lender or investor that his money is secure is to convince him that you are an honest, sincere person. At least as many businesses fail to get financed because potential investors dont like the person making the sales pitch as fail because they dont like the pitch itself.

a. Return on Equity Investments: Whats Fair     Every investor has her personal requirements and every deal is different. The important thing is that both parties understand the risks and think it is a good deal. Here are some suggestions that have worked well for others in situations where the potential investors werent well acquainted with the entrepreneur. Obviously, if your investors are family members, close friends or people who wish to support your business for political or personal reasons, they may be willing to accept a lower rate of return.

Should You Guarantee a Return?

Very few investment proposals offer the investor any guarantees. Nevertheless, some equity investors want a guaranteed return in addition to a share of the profits. If you guarantee a return, you will pay back the original investment plus a profit on the investment, even if the deal goes sour. Doing this is great if the project makes the profit you think it will. But its a risk for you since