Pros and Cons: Funding from an Angel Investor
With private investment playing a large role in American small-business development, should your firm be looking to the heavens for an angel of its own?
Do you want one of the mega-entrepreneurs on Shark Tank to back your business? Okay you may not get a chance to have Mark Cuban or Barbara Corcoran write you a $2 million check, but there’s no shortage of other wealthy angels out there who are ready, willing, and quite able to invest in your dream.
Using their demonstrated expertise in professional investment and/or running a business of their own, these investors infused American small businesses with $36.2 billion in 2022, according to the Securities and Exchange Commission. Should your new or emerging business try to get a piece of the action? These pros and can get you started on making the right decision:
Calling all angels
Looking for an angel investor that understands your business and its mission is a challenging but potentially rewarding process. Here’s how to get started:
Explore your professional circles: Your attorney, accountant, or financial advisor, as well as local business organizations, may be able to help. Their making the all-important “warm” contact implies trust and credibility.
Network, network, network. Do a search on “angel investor networks” in your area or industry that connect accredited investors to entrepreneurs.
Leverage online investor groups: To establish direct communication with angel investors.
Helpful hint:
Whether you’re pitching an angel investor or a convention lender for funds, be ready to roll with as much information and documentation as possible.
The pros: Explore these benefits.
A slim (or lack of) credit history won’t count against you. Many startup or developing businesses can’t meet a bank’s strict credit requirements. However private investors are more inclined to use a business’s profit potential as an indicator of its worthiness.
You won’t need to pay it back. The investor is hoping that your firm will make a profit and share a pre-established percentage of it with them. If you don’t, both you and the investor share the loss.
Angels can help you make better choices. Because they have a vested interest in your success, your investor will be eager to share ideas, learnings from their own management experiences, and moral support.
The cons: Consider these tradeoffs.
The stakes are higher. An investor’s cash may come with financial performance requirements. Make sure your investors’ expectations are in line with your capabilities and reasonable revenue goals, otherwise you may find yourself severely stressed out.
Expect a smaller piece of the profit pie. Investors take a risk because they see a potential for greater profit than they’d get with traditional investments. That said, make sure that the investor’s cut doesn’t diminish the benefits of owning your own business.
Be ready to share control. An additional stakeholder in your business means you may get a co-manager. (Though in some cases, an investor may be completely hands-off.) Discuss what will be expected in this department before signing any agreement.
Weigh your options.
If you decide that angels aren’t your best route, you may use a bank, a fintech lender, or maybe a crowdfunding platform to jumpstart your operations. But no matter what route you choose, being armed with the best information is a great start to making the right choices. We’ll discuss the pros and cons of other funding sources in future posts.
Since 2008, Fora Financial has distributed $4 billion to 55,000 businesses. Click here or call (877) 419-3568 for more information on how Fora Financial's working capital solutions can help your business thrive.
