Angel investors may be one way for small businesses to find the financing they need to either further their current business or begin a business, as these investors provide an alternative for companies who are looking for some form of financing without using small business loans from traditional banks. Many companies often have found that acquiring a small business loan from a major financial institution or credit union can be difficult, despite the fact that there are some indications that more banks are beginning to loosen small business lending practices, among other areas of financing.
However, angel investors are deemed by many to be a helpful resource when it comes to not only getting funds for a business but helping a particular company grow and meet its full potential. According to the SBA, angel investors will obviously look for companies that have the potential for high growth and have founders or a management team that are clear in not only their business plan and future goals, but have simply established firm management practices to further their company. Typically, any small businesses who will approach either venture capitalists or angel investors will have to have a well-defined outline of their company, its operations, projected and past earnings, and future goals.
Yet, these angel investors may also be helpful as many of these individuals are said to often come from backgrounds either related to the business in which they are investing or are simply entrepreneurs and executives who may have been generally successful when it comes to running a business or may be well-versed in a particular business area where they plan to invest.
Business owners, though, need to make sure that they not only understand the risks that an angel investor may take, which will help them better formulate a pitch to particular investors, but businesses also want to look at the past investing that a particular investor or company has been involved with so as to better find an accredited source of financing and potential aid from these investors that may be of a higher caliber. As an example, businesses need to understand that investors do face a great risk and will not always offer a high amount of financing to a new company until they see that the management team is on the path to success. According to the WallStreetJournal.com a study, “examined roughly 400 completed angel investments that lasted at least a year and found that more than 100 ended with the company going out of business, handing those investors an average annual return of minus-93%.”
Obviously, business owners do always run the risk of having their venture fail, but when it comes to looking for an angel investor or a group of investors who may be willing to offer financing for a particular small business, companies must be well prepared to make their pitch and essentially sell the investor on the potential growth and profitability of their company. Yet, finding reputable angel investors or working with a well-established venture capital firm is also necessary, as many of these investors may want to be on a business’s board and have a say in the day-to-day operations, which will obviously be more beneficial to a business owner if this individual is highly qualified. Yet, just as with small business loans, these sources of financing are no guarantee no matter how well a business is set up, but for companies looking to avoid small business loan debt, these angel investment opportunities may be helpful for some. Though, businesses must be cautious about who they work with and any requirements an investor may have when it comes to their position within the company or what the particular investor expects from the business owner in terms of earning on their investment.