Dictionary
Debitoor's accounting dictionary
Investor

Investor - What is an investor?

An investor is an individual or entity who allocates capital for future financial gains.

Looking to launch a new business? Check out our guide to get financial backing from a bank or investor.

An investor provides capital in the form of money or assets to help start or further a business. Their investment is provided with the expectation that they will receive future gains in the form of money or assets.

Investors rely on the return on investment (ROI) to determine how successful or profitable a certain investment will be. This is measured by how much the business will earn based on the amount invested. When you make an investment, there is always a risk that you may lose your money.

5 types of investors for small businesses

If you are starting a business and looking for investors, there are a few different paths you can take. Depending on your business, you can choose one of the following types of investors, each of which has a different quality and extent of involvement in your company.

Banks

Banks can provide business loans to small businesses and startups. If you are seeking a loan from a bank, you will generally have to provide proof of revenue or collateral for the application to be approved. Therefore, bank loans are generally used if your business is already established and earning a profit.

Peer-to-peer lenders

This type of investor can be an individual or group that offers funding to small businesses. There are certain companies that specialise in peer-to-peer lending. You need to submit an application to one of these companies, and once approved, lenders can decide if they wish to provide support to your company.

Business Angels

A business angel investor, also known as a private investor or seed investor, is an individual who has a high net worth and provides financial support to small businesses. Business angels can be anyone willing to invest in your business, from friends & family, or members of the public who you found online, or through an event.

Personal investors

Personal investors are generally friends and family members who invest in your business, usually in the early stages. This type of investment is generally a small amount to help get the business started, in order to apply for other loans and opportunities.

Venture capitalists (VC)

Venture capitalists are firms that provide a significant financial investment to a company they believe has a potential for substantial growth. These investors generally only provide support after proof that the business is already established and earning a profit.

What is the difference between an investor and a shareholder?

The main difference between the two is that a shareholder buys shares (of ownership) in the company, where an investor can provide a variety of assets or capital to a company.

A shareholder can be any person or company that invests in a business that provides shares. Shareholders generally own a company but do not have much responsibility for the day-to-day operations of the business.

An investor, on the other hand, is a person or company that puts anything of value into a company in return for potential financial gain.

An investor can be a shareholder, but may also lend capital to a business, not in the form of shares.

What is the difference between an investor and a trader?

The main difference between an investor and trader is that investors tend to allocate capital for long-term gain, whereas traders seek short-term profit by purchasing and selling investments at a quicker rate.

Investors are more likely to stick with the investment during short-term losses for the potential long-term gains. A trader will often make changes and trades that will help them profit quickly from shifting markets.