Funding For Small Businesses Via Angel Investors

Outside of receiving a loan from the Small Business Administration, the most common way to have your business financed is through the use of an angel investor. In many instances, entrepreneurs turn to these private financing sources because they are able to provide flexible financing terms with the intention of being able to cash out their investment at a much later date. Unlike SBA loans, an angel investor is primarily seeking to profit from the capital appreciation that is associated with your business. As such, if you do not qualify for small business financing through a normalized method of lending then it is may be in your best interest to work with a private funding source to assist you in obtaining the capital that you need in order to start or expand your business activities. 

Throughout our series of discussions, we have primarily focused on the benefits of working with an angel investor instead of a small business investor. Of course, in addition to the capital that they provide, a small business investor or angel investor is able to provide you with a substantial amount of guidance and information as it relates to the ongoing operations of your business. The Small Business Administration is generally able to provide you with a similar amount of information, but an angel investor that has a stake in your company is almost more than willing to provide you with a substantial amount of direct guidance as it pertains to bringing your business to profitability or generating a positive cash flow. We are going to continue to discuss the merits of receiving funding for small businesses via angel investors through many of our future articles.

Of course, the primary drawback to working with an angel investor is that they are going to want to have a significant amount of say as it relates to their investment. This is primarily due to the fact that your private investor is going to become a major owner in your business. Additionally, the investment contract that you sign with a private investor is going to dictate the level of day to day control that a potential third party funding source has in your business. As we have discussed before, when you sell a significant portion of your business to a third party investor you can expect that they are going to want to sit on your board of directors while also being able to have selective control functions as it pertains to how the business is run on a day to day basis.

As always, you are going to want to make sure that obtaining small business funding via the use of an angel investor is in your company’s best interest. One of the most important things to consider is not only the cost of capital as it relates to an equity sale of your business, but also how much control you will have to give up when working with a third party funding source.