Business Loans

What are Angel Investors?

You are a budding entrepreneur with a relatively new business.  You know the odds of a new small business surviving beyond the first five years.  The statistics are not encouraging.  But, you know you can make it.  You simply need to find some alternative sources of funding.  So, what are angel investors anyway?

Angel investors are definitely a unique breed of individuals who take opportunities to invest in small business entrepreneurs. Sometimes, they are simply people you chance to meet who decide you might have a good thing going, so they put their own money into the pot.  At other times, a person may be actively searching for a good new business opportunity to contribute to, in order to help out new business owners.

Either way, these people are angels, because they are more likely to contribute to your success in the early stages.  Although they do expect a return on their investment, it is also understood that, like you, they are risking their own money in the hopes that this great idea of yours will blossom into a profitable business.

So, who becomes an angel investor?

•    Former CEOs
•    People with Common Goals
•    Helpful Opportunities

Essentially, an angel investor can be anyone who has capital to put into your business.  The backgrounds and types of people who choose to become angel investors are as diverse. Some angels may seem like a logical type to become a small business savior.  Others who are willing to believe in your small business enterprise will be an unlikely candidate for such a practice.

Former CEOs

For example, a retired business executive seems like a person who is more likely to find a small business and share their capital.  After all, he/she understand the inherent risks, and the whole gambit of profits and losses. With a good eye for spotting entrepreneurial talent, it would not be such a shock if this type of individual asked for an audience and handed you a check.

Common Goals

Similar to former executives, some angels share a common goal and want to help make sure you have every opportunity to succeed in your venture.  For example, what if your business deals with the development of new products and services for people who are legally blind?  Someone may want to help finance your research and development because he/she has visual problems or has a loved one who might directly benefit from your venture someday.

Business Opportunists

Probably the hardest angel to figure out is simply the business opportunists.  Without any rhyme or reason, someone has chosen to help you out.  For personal reasons only he/she understands, you have been chosen as a recipient of a capital investment.  In other words, as long as it is on the up and up, the investor may not have any agenda, other than wanting to help you out, and maybe make a little money in the process. What these business opportunists bring to the table may be a lot more valuable than money.

Angel Investor Value

If you are lucky enough to have a generous individual come knock at your business door with a check in his/her hand, do not assume money is all that is being offered to help you succeed.  You may also be the recipient of:

  • Entrepreneurial Expertise- Your angel may have already been down the same financial and operational road.  He/she has insight to share to help you grow your small business, while avoiding the pitfalls that can slow down or ultimately kill your chances of success.  Someone who has once walked in your shoes can understand your triumphs and trials like nobody else.  You can greatly benefit from their experiences.
  • Executives- Former business executives have a greater understanding of what it takes to make your business a successful venture. The advice they might be able to offer can be invaluable.  In these tough economic times, it may be the difference between you watching your dream venture fade or be a success.
  • Wealthy Mindset- No, it is not just about the money.  But, people who have already been successful can share their thought processes and how they worked toward business goals.  Especially in the beginning, what was accomplished to make sure the doors stayed open and the customers kept coming back for their product or service?
  • Other Angel Resources- Your angel may also know other angels who may want to invest in your small business enterprise.  As you know, it can take many investors and lenders to give your business the financial boost needed to grow. So, it can be a real asset to know about other angels.
  • Potential Customers- Angels often know resources and people that will lead to potential customers.  Sometimes, they have the inside knowledge and understanding to lead you right to success.  In fact, it may be largely why they have the confidence you will succeed and give them a good return on their investment.

You may be blessed with a goldmine of information as well as small business financing. Take the opportunity to find out about your angel.  He/she may have the key you have been trying to find that will make your small business venture a true success.

Small Business Financing Through Friends and Family

Worldwide, the majority of new entrepreneurs get at least half of their small business financing through friends and family. Generally, it far exceeds any funding by investors or commercial lenders.  However, accepting financial help from those you care about the most should not be considered lightly.  According to the well-know quote by William Shakespeare, “for loan oft loses both itself and friend”.

Likewise, other experienced entrepreneurs will warn you not to go into business with loved ones.  Even in the best of times, relationships are a challenge.  But, make a mess of a relationship over monetary issues, and you both could lose something that money cannot buy.

So, before you even go knocking on any doors to discuss your business, you really need to carefully consider whether you should ask in the first place.

As you are contemplating the pros and cons of talking to friends and family about money, you need to first ask yourself 7 very important questions:

1.    Do they have the money?

You are not omnipotent or all seeing.  Are you sure your friend or family member has the money to invest in a small business. At one time they may have seemed flush with cash; but, maybe times have changed.  If you ask and your loved one does not have the money, or it is already earmarked for something else, it may put a strain on your relationship to even bring it up.  No one wants to feel like the bad guy and have to say “no”.

2.     What if you lose the money?

Despite best efforts, there are never any guarantees when you start a new business.  It is a gamble any way you look at it.  You can do all the preplanning and analysis known to man, and then the market turns and your dream hits the skids.

So, do you friends and family understand that there is no way to promise they will get their money back and then some?  If they lose their investment, will it adversely affect your relationship?  Can they do without that money forever, if things do not work out?

3.    What is your attitude about the money?

Be honest!  Do you feel like you are entitled to that money?  If you ask your parents for the capital to start your business, is it going to cause problems between family members?  Are your siblings going to be upset, if you get a handout and they do not? Even if you feel like your parents owe you money, they may not have it to give.

4.     How will you pay it back?

Every new business goes through periods of famine, when there is more capital going out than coming into the business.  If times are tough, are you going to treat friends and family like a creditor and make the agreed upon payment; or, are you going to let payments slide because they will not destroy your credit like a commercial lender?  You will need to get it in writing as a contract.  Make the transactions legal, so loved ones do not feel like you are simply taking advantage of their generosity.

5.     Could you permanently lose a friend or destroy family ties?

Many relationships have been destroyed over money.  Is it worth the risk?  What if your friend or family member does not truly understand the nature of the loan?  He/she might assume that in a year’s time there will be a substantial return on their investment.  If it doesn’t work out that way, will feelings be hurt beyond repair?  You must count the cost.  It has far-reaching consequences beyond the money.

6.     What is the money?

Is the money a gift?  Is it a loan?  Is it your Inheritance given while you parent(s) are still living?  The source of the money should be very clear.  Then, make sure to get the transaction all down on paper.  Even though it comes from a friend or a family member, use legal documentation.  Whether it is a week, a year, or 20 years from now, there should be no question regarding the money.

7.     Are you going to protect their investment?

When it is your own money you invest in business, you can spend it as you see fit.  However, if you are taking money from friends and family, are you going to protect their money to the best of your ability?  In other words, are you going to be a little more careful how you spend the money? In fact, it may be a good idea to have an itemized list on how their small business investment will be spent.  Is it to pay employees, buy a new piece of equipment, and increase the inventory or something else?

Before you borrow money from friends or family, be sure to count the cost.  It could mean a lot more than simply returning their money and giving them a good return on their investment.  A small business loan or an entrepreneurial investment is not worth risking a loving relationship. So carefully consider small business financing from friends and family.

Small Business Financing Risks Involving Angel Investors

Acquiring financing can be one of the most challenging aspects of starting a small business. You have a vision.  You have done all of the research.  You know exactly how much money you need, and how it is going to facilitate business growth. But, you have to convince investors or lenders that you entrepreneurial endeavor is going to take off, and you are worth the risk.  On the other side of the proverbial coin, you need to be aware of the small business financing risks involving angel investors.

The best kind of angel investor is the person(s) that advance you the necessary money and leave you to use the money as needed.  You make all of the decisions; you have control of the money; and, you angel sits back and waits for a return on their investment.  They understand the potential risks and benefits of helping entrepreneurs.

However, not all investing angels are simply content to try and get in on the ground floor of a potentially successful venture and sit back and wait for the profits to start rolling in as another source of income. Some people feel entitled to get to close and cramp your style.  In some cases, it can be a blessing; in others, it can be a curse.

How you feel about your angel depends on your personality and expectations.  But, you simply need to be aware of the various relationships that can develop after you are given money.  Then, you can decide whether the benefits are worth the risks.

Dark Angels

Beware of the dark angels.  If you get involved with an angel of this caliber, your entrepreneurial dream can turn into a nightmare.  Yes, you will receive the money needed for you small business; but, strings will be attached that you may not necessarily be aware of, until it is much too late.

While you are struggling down the path to a successful business, your angel may be a regular presence or sitting in the background waiting for your product or service to start generating significant profits.  Then, your dark angel will swoop in, taking over the business, and leaving you wondering how your venture now belongs to someone else.

Before accepting money from any lender or investor, make sure you understand all of the fine print.  If needed, you should hire a small business lawyer to go through all paperwork, before you sign on the dotted line. Never assume that you angel always has your best interests at heart, in addition to their desire to make money.

Mentor Angels

Mentor angels are truly the best kind of angel you will find to invest in your small business.  They have a genuine interest in helping you succeed.  Most have walked many miles in your shoes, and know the challenges you will likely face as a small business owner.  Mentor angels are great cheerleaders, and they can be valuable advisors, especially during the time you are trying to get your business off the ground.

But, if you are the type of person that does not take constructive criticism or advice well, you may not want to ask a mentor angel for money.  Even though their intentions are totally honorable, it can make for a very strained relationship, if you already have a business plan and prefer to always do it your way.  In other words, if you sink or swim financially, it will be thanks to you and no one else.

Inheritance Angels

Inheritance angel investors should be approached with caution.  While they may have recently come into some money, many have no idea how a small business becomes a profitable venture.  Thus, they may have unrealistic expectations regarding the return on their investments.

Also, since they are your angels, they may feel like they have a right to dictate how you run the business.  Unfortunately, all of their ideas are not grounded in experience. While they may simply be trying to be helpful, it can be a thorn in your side, when you are striving to implement your own business plan. In other words, you are not looking for a partner, and you certainly do not need the added responsibility of schooling someone in the finer art of business, because they feel entitle, due to their riches.

In short, angel investors are a great resource for small business financing.  However, before cashing that check, you need to understand where your benefactor is coming from.  Is it someone who understands business investment risks, or is it a person who has unrealistic expectations for a return on their investment?  Is it an individual with business experience who will be a little too helpful, or someone who plans to take over once you have done all of the hard work? Angels can save your business, but you need to know the small business financing risks involving angel investors.