What's the Difference between VC, Angel, etc.?

Article after article about the small business' struggle to get a bank loan appears in newspapers like The Washington Post, The Wall Street Journal, and Business Week. We know how bad the economy is and the subprime mortgage mess has left many banks tightening their loan processes (read: longer, less likely to qualify, and more paperwork).

Because of this, businesses look elsewhere for funding needs. This could be venture capital, angel investors, financial organizations (other than banks), peer-to-peer loans. Let's define each one.

Angel investor (also known as private investor): Individuals with high net worth who invest their own money. They look for innovative companies and support the entrepreneurial spirit. Maybe they're passionate about the start-up product or service. The Center for Venture Research reports a small decrease from 2007 Q1, Q2 and 2008 Q1, Q2 at 3.8 percent. However, funding investment went up by 4.2 percent. Businesses that need some strategic direction and not a lot of money look for angels. Angels work better for businesses looking at a couple of millions in revenue per year. Think loans in terms of $25,000 to $75,000.

Venture capital (VC): An organization or institution rather than an individual that often invest far more money than angel investors do. National Venture Capital Association (NVCA) found that VC fundraising number slowed down by 29 percent in 2008 Q3 compared to 2007 Q3. The dollar value for the same period dropped 6 percent. Start-ups looking for millions of dollars of investment and plan to grow on a large scale tend to use VCs.

Financial organizations: This refers to those that aren't banks or savings and loans. They offer financial services that tend to be more flexible than what banks can offer. They also have different requirements for qualifications, which can also move much faster than a bank -- within a week in many cases. Some may not require collateral. Interest rates vary. Start-ups and growing businesses look toward these.

Peer-to-peer loans: Loans from colleagues and family or using online loan sites. While you can shop around for bids, these may not have much protection or such loaners don't have the knowledge that comes with business finances. Interest rates vary.

You also need to consider the type of funding. Maybe you want to do factoring (selling your accounts receivables) or take out a line of credit. Whichever route you take, educate yourself and ask questions.