Using Angel Investment for Small Business Funding
While the prospect of taking on investors may be stressful for some new business owners, it is important for those looking to fund their new business to understand the benefits of angel investment as well as the disadvantages so that they can make the wisest decision possible when funding their company’s growth. Angel investment can be a great option for business owners that want to get their brand new company off to a good start; here is a guide to using angel investment for small businesses.
A Brief Explanation of Angel Investment
Anyone who has ever seen the show “Shark Tank” and watched as business geniuses like Mark Cuban, Daymond John and Lori Greiner evaluate the prospects of new businesses looking to be funded has watched an angel investor in action. In the simplest terms, an angel investor is a person/organization that buys equity from your company. They will give you a sum of money that can be used to expand the business or pay bills in exchange for a piece of future revenue. Angel investment funding for startups can be great when the business needs money in order to keep going and the owner is okay with sacrificing a bit of their ownership in order to further the growth of the company. Angel investors look for companies that they believe have the potential to explode in size and profitability so that their original investment can make them millions or even billions of dollars going forward. Business owners trying to figure out how to attract angel investors must keep in mind that the investors will want something that has high potential, as most startups do not succeed and therefore the upside must be large enough to justify the risk.
Advantages of Angel Investing
Using angel investors to fund a small business has many advantages, and in many cases is at the base of successful businesses. First of all, angel investing is one of the best forms of funding for small businesses that are looking for personalized and interest-free financing, as the people that are coming on board as owners of the business will most likely want to be involved in the development now that their money is tied in. This means that the investors have incentive to bring their own business knowledge and experience to the table, which can be extremely helpful in giving a company that is beginning its expansion a competitive edge over industry rivals. Furthermore, the presence of these investors can bring credibility to the name of a small business twofold: first through their recognizable names (depending on how successful they are), and second because companies that have angel investors have already been deemed high-quality by those investors, causing other funders and even customers to view the business well. Another large benefit of using angel investors is that the money can come from non-institutional lenders, which is a plus for companies that are afraid of big banks trying to rip money from their hands. This is only furthered by the fact that angel investor funding for small businesses is, again, debt free. Finally, the fact that angel investors can use different methods to get their money back – royalties, equity, or even stock options – means that owners using angel investors to fund a small business have many options regarding how those investors can get their money back. Investors and companies can negotiate on this topic to their heart’s content.
Disadvantages of Angel Investing
While there are many advantages to angel investor funding, it is also important to remember that this method of funding is not perfect for all companies. First of all, by selling equity to angel investors, you are giving up a slice of your ownership in the company. This has two results, namely that the owner has less power and makes less profit if the business explodes in size and revenue. This can be offset by the fact that the angel investing might be the thing that causes profit to expand massively, but is always important to keep in mind when considering giving up a part of your ownership in your business. In addition, the angel investors (who most likely care much more about their money than they do the company) could pressure other owners to make certain moves that they might not be comfortable with, such as expanding the company rapidly or changing something about the product or service. Additionally, angel investor funding for startups can make it difficult to get cash from other sources, as investors that are considering coming onto the business after the first round of funding have less equity available as some of it has already been sold. Finally, small businesses may have a lot of trouble finding angel investors willing to become involved in the company, as the risk involved in becoming an angel investor for a startup is quite high and investors will be careful in choosing which companies they will support.
Is Angel Investing Right for Your Business?
Once you have considered these upsides and downsides of using angel investing to fund your business, you should be well equipped to make a decision regarding your use of this method of financing. Angel investing can be great for companies that are hoping to experience explosive growth, but businesses that intend to remain small may want to think about their other options as to not sacrifice ownership of the company.
When a small business owner is hoping to not sacrifice their equity while also remaining debt-free, invoice factoring can be the perfect solution. By selling accounts receivable to a factoring company, your business will neither give up ownership nor take out a loan while getting the money that you need to fund short-term opportunities. Call Factor Finders today to learn more about how you can begin factoring your invoices so that your company can grow.