When you buy a home or a car you head over to a bank or financial institution and ask for a loan. Generally, the process is really straightforward and takes anywhere from a few hours to a few weeks. But when you’re looking for funding for your new business, well, unfortunately, the process just isn’t as simple. There are too many factors, and even if you do qualify for a bank loan, this may not be the best course of action.
Up until just a few years ago when you needed funding for your business you only had a few options open to you: invest your own money, max out your credit cards, take out a loan on the equity of your home. While many entrepreneurs used these methods, they all involved substantial risk. However, now, thanks to technology, that’s all changed. There is a new funding option that leads to fewer personal financial risks. This option is called angel investing, and it offers an investing solution for both startups and investors.
While this type of investing has existed for a dozen years or more, it wasn’t an option easily accessible by most entrepreneurs. Finding the people that could connect you with someone who had large amounts of capital was difficult, then once you had your foot in the door, you still had to convince him of the soundness of your business. Technology and the Internet, however, have made it much easier to come into contact with Angel Investors. Through crowdfunding websites, you can easily contact large or small investors that can help you’re your startup.
What is an Angel Investor?
These are specialized investors who make at least $200,000 a year, or who have$1,000,000 in investment capital. According to Forbes Magazine, there are currently about 756,000 angel investors in the U.S. and thousands of others in other parts of the world. In the past when they backed a business, they had to do everything possible to ensure it was a sound project, and often that meant rejecting up to 75 percent of most funding requests placed before them. However, crowdfunding sites now allow them to make a wider range of investments in smaller amounts, and in this way they can diversify their investment portfolio, allowing the successful investments to compensate for those that don’t work.
Do I Need to Find an Angel Investor?
Although angel funding is certainly a godsend for many, it isn’t the best option for every entrepreneur. So, before you go out and find yourself an angel investor, you need to decide on whether this is the right option for you. Let’s discuss both the advantages and the disadvantages to using angel investors.
The Advantages to Using the Bank
A bank can sometimes offer you a business loan, but only if you have substantial collateral, property or something that can back up this business. In many cases, small business owners prefer banks because there is a certain level of tax relief, and you don’t have to give up ownership of your company.
The Disadvantage to Using a Bank
Just as there are some advantages to using a bank loan so there are disadvantages. For instance, it can be very difficult to get a business loan, especially when you don’t have substantial collateral. Your background is thoroughly investigated, and if anything looks suspicious, you probably won’t get authorized. If you use the equity in your home or any property to back the loan, you could risk losing it if the business fails.
The Advantage to Using an Angel Investor
Seeking the help of an angel investor may take more organization andpreparation. After all, you have to convince someone of your value, your passion and of the value of your business, but if approved, you get access to capital much faster than when you apply for a loan; and investors of this type can often support you with large amounts of capital, something a bank is very wary of doing. An added advantage to finding an Angel investor is that you will benefit from the investors advice. This is usually someone, or a group who has experience running a business, and this personal relationship certainly offers you several advantages. Also, if you get funding from investors you won’t go homeless if your business fails.
Disadvantages to Funding from Angel Investors
The biggest disadvantage to finding investors is that they will want to share ownership and will require a certain percentage of your profit. To many entrepreneurs this doesn’t really present a problem, and even seems fair. Most entrepreneurs believe that finding angel investors is extremely difficult, and while that might have been true at one time, this is no longer the case, especially now that crowdfunding website have become available. These are websites where you can post your business type, project, needs and even request smaller amounts of funding from a larger number of investors.
Regardless of your funding preference, you need to learn of the different criteria available from each funding source, then make your decision from that point. Regardless of your likes or dislikes, you should base your decision on the funding method that brings the most benefits to your business.