Many businesses benefit from investments for a range of different reasons from funding startup costs, to helping with regular operational costs. The main types of investor that businesses acquire are banks (through loans), venture capitalists (usually for very large sums) and angel investors.
What is an angel investor?
An angel investor is someone, or sometimes a group of people, who have spare funds to invest in a startup or a small business venture. An investor will look to buy shares in the business and eventually make a profit of at least 25% of their investment by selling their shares much further in the future. Some angel investors will be family members or acquaintances of the business owner, although some may not know them before they agree to invest, they may simply be looking for good investment opportunities that give better returns than other investments.
The investment could be an initial amount of money that will cover the set up costs of the company, or it could involve regular cash injections, to help with the ongoing running of the business.
Advantages of using angel investors
More favourable terms
Choosing angel investors rather than other forms of funding has many benefits for the entrepreneur, including more favourable terms. So, instead of paying the bank large interest payments on top of the loan repayments, the business owner will have the funds available from the investor and will not be expected to make any payments back as the investor takes a stake in the business instead.
This relieves a lot of pressure and keeps the costs of running the business lower in the crucial first stages of getting started. In the first few months of setting the business up, there are likely to be lots of costs, so not having bank repayments to worry about will make it a lot easier to get the business to a profitable position.
Less risk involved
Another big advantage is that angel investments are less risky to take on than getting debt financing. If a business fails, (and unfortunately the majority of startups do fail), then the capital does not need to be paid back. Angel investors will be looking for more than profit from the business, they will generally have a more personal involvement. This means that it is more risky for an angel investor to lend money than it is for a bank to lend money.
More flexibility in the agreement
With angel investors you will usually have more scope to agree terms that both parties are happy with. So, in terms of timescales, the amount of money and other details, the entrepreneur should have a lot more flexibility compared to the monthly payments and the term lengths required from banks and other types of lenders.
You can get their expertise and input
Angel investors are usually successful business people that began as a startup company and developed into a big company, or have run multiple companies. They have probably acquired great business management experience and knowledge of the market and know what it takes to make it in your chosen industry. Because they are investing in your business, they will be keen to provide you with their support and insights that they have built up over years as successful entrepreneurs.
Finding an investor with experience in your industry is particularly beneficial, so if you are looking for people to approach for investment, consider people within the industry who have a track record of success before you go to others who do not have any knowledge of your industry. You might also be able to make good use of connections that they have within the business.
Some angel investors will want to be heavily involved in the running of the business, whilst others will be happy to take a backseat, so make sure you have these discussions early on, to ensure that you are both in agreement with the level of involvement they have.
Decisions can be made quickly
When it comes to getting a decision about the investment or any other part of the business that an investor would be involved in, an angel investor will have the freedom to make decisions quickly, as the funds come directly from them and they don’t need to get the green light from others, like you would in regards to venture capitalists.
Suitable for business startups with smaller finance requirements
If you are a relatively small startup with a finance requirement for thousands rather than millions, an angel investor is going to be prepared to make the investment, whilst a venture capitalist would only take on much larger investment opportunities.
You don’t have to go through bank credit checks
When you apply for finance through a bank loan, the bank will have strict lending criteria and will perform credit checks on the directors of the business. This means that some startup entrepreneurs would get declined if they had some adverse credit history, even if it was related to their personal finances and not their business finances. With an angel investor, they are not going to have the same strict criteria when they consider who to invest in, it will be more based on their personal preference of whether they want to get involved in your business.
Taking on a business loan can also affect other credit you may be able to get with your business. For example, if you wanted to get a business vehicle or equipment on credit, if you have a large business loan outstanding, you might not be able to get additional credit for other parts of your business until the loan has been paid off.
Final Word
So, as you can see, there are plenty of benefits of using angel investors to get your business started up and it is easy to understand why this is becoming a very popular way for startups to secure the financing they need to launch a successful business.
If you don’t mind losing some of the control in your business and are happy to share future profits, then angel investing could be the perfect investment opportunity for you. By losing a bit of control, you can benefit from the experience and business acumen of an angel investor and better finance terms, making it a very effective way to develop a profitable business.