Should You Use Funds from an Angel Investor?

Let’s say you got a really exciting business idea, and you’re considering the many different ways you could use to acquire capital to get your business growing. Some of those sources could include:

• 504 loans
• Bank loans
• Your own cash
• Funds from family and friends
• Crowdfunding websites like Kickstarter
• Angel investing

But, is angel investing really a good source of funding for you and your business? Check out these pros and cons.

Pros of Angel Investing

• You get money – If you need it and you’re happy to offer some equity in your company, angel investing may be a good choice for you. Getting access to capital at critical times during the early years of business can help you grow ahead of the competition early on.
• You get smaller amounts – If you need less than half a million dollars to move your business forward, angel investing again may be the right solution. Venture capital typically seeks larger, more established businesses with consistent revenues already in place.
• Flexibility – If the bank is too stubborn to give you access to money, angel investing may instead be the best solution. Angel investors are investing their own money, which means you can typically structure the deal in just about any way you and the investor agree to.

Cons of Angel Investing

So now you know the pros – let’s take a look at the cons:

• Can cause more problems than it’s worth – If the investor is only interested in making money, they may be less patient and unwilling to offer any mentoring to you during the formative years of your business. Because “angel investor” isn’t an often advertised position or type of company, finding one and getting an accurate idea of its character can prove difficult.
• May want a large share of your business – Angel investors may want to own 10% or more of your business. They view this as reasonable because they know investing in a young, unproven business carries a higher level of risk. In addition, they also know your access to other sources of capital is limited, which they can use to their advantage.
• You may lose control – Depending on the investor, you may have to give up some of the control of your company. What you started and envisioned may no longer become a reality. This is particularly frustrating if the angel investor doesn’t have experience in your industry. It is, however, a reality of angel investing.
• Rarely invest again – One-and-done is usually the rule with angel investing. Because it’s risky to buy a stake in a young company, an angel investor may not want to provide more capital should it become needed later on. You may have to find another investor and give up more control of your company, or search out another funding source.

So, Should You Do It?

Ultimately it’s up to you, but do be aware angel investing carries with it a number of inherent risks.

A 504 loan provides a low-interest, non-invasive alternative to angel investing for certain business types. If you need access to capital to grow now, consider contacting NEDCO to learn more.