Pros and cons of a private investor?

What can we expect from a private investors and what kind of return do they expect. Is a sba loan better?

Private investors cut down on the red-tape of loans and such but they demand a lot more than the bank does.

They usually want high returns immediately and sometimes want more control in how you run things at the company.

There's a great book that you've got to read, if you're serious about this: Angel Investing. It's about 500-600 pages long, and will give you the most comprehensive view of what's out there as a small business looking at investment structure.

That said, here's some basic stuff:

Private investors come in all shapes and sizes. Sometimes they are bored retired people looking to do something exciting, sometimes they want to find companies worth taking public, sometimes they want to rebuild their local community.

Whatever the motivation of the angel (first source of equity capital), equity money is always the most expensive. People use this kind of money because traditional banks aren't set up to be able to fund their growth.

The game basically works like this: you take an idea and get it executable. You go to your first investor, and give up a piece of the company. They grow you for a bit, and then you go to your next level, then your next, then a mezanine level, then public. That's the ballgame for people on that path. If you're not strongly positioned for a public offering, then you've got to create a VERY GOOD exit strategy for your investors so they can evaluate your investment. You'll need the book mentioned above to get your head around how much your giving away, and for what.

If your business isn't going to need a whole lot of capital (say under a few million), and it's going to have assets to back up the loans, then a bank will be the way to go. Using the SBA makes debt financing a lot more expensive, but sometimes the only way to get a loan when first starting. The SBA will guarantee a portion of the loan, reducing the bank's risk and eventual willingness to make a loan. The tradeoff is higher startup fees.

When you're looking at collateral for loans, consider real estate worth about 80% of it's market value, long-term equipment about 60%, short-term equipment about 40%, and inventory between 10% (raw materials--commodities) to 30% (finished goods).

All that said, here are some people you're going to want to know: the local chamber, a banker, a commercial real estate agent, a commercial lender (independant of a bank), an accountant, and eventually a lawyer.

Before you get too tied down with the ins and outs of finance, I'd first recommend The Art of the Start by Guy Kawasaki (Apple's Marketing Guy for the first 20 years or so, and garage.com's founder). It'll keep you focused, alive, and positioned for whatever finance you're going to need in the future.

Best of luck!

private investors can become your unwanted partners! if successful, they can be expensive to buy out. you are putting in all the work, why share the spoils with an investor.

Not sure how much you're looking for. Most angel investors are looknig for an "IPO-able" company - so there is a "liquidity event" for them. Most savvy investors (Angels and VCs) are looking for about 40% / year... and want their $s out in 5 to 10 years (max). They usually get this return by an EQUITY investment, instead of DEBT (which is a loan). That is, they expect [1] they will own a portion of your company, and [2] their return on investment will come from the increase in valuation of your company - when you sell or get acquired.

An SBA loan may be a lot better... especially if you're just looking for a small amount. In fact, most experienced investors don't look for tiny deals. Too much hassle. Too low return.

Hope this helps!