Individual business angels for small business

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Individual business angels

Individual business angels are individuals who wish to invest their money in business. They may be friends or family who have extra money and are prepared to invest that money with you rather than a bank. This type of investment may take the form of a loan or it may be in exchange for shares in the business. Whatever you both decide make sure that everyone knows what to expect. Entering into these types of agreements without a legal agreement is a recipe for disaster. In the case of a loan, make sure the repayments are clarified and the interest rate makes it worth their while as well as yours. If they are buying into the business you need to agree on how they will be rewarded and what happens if your business fails. Covering all the contingencies before you enter the agreement can go a long way in ensuring your friend is still your friend in the future - whatever happens in the business.

The other type of individual business angel can be seen on TV's Dragon's Den. Wealthy individuals who are looking for good business ideas and who will bring expertise as well as money to the table. They will usually want a say in how the business is run but these issues need to be clarified before you sign on the dotted line. These deals will be more likely to extract a larger share of your business for the investment so you need to make sure that the connections, expertise and advantages they bring beyond the money are worth that loss of ownership.

Ideal for:
A business that perhaps doesn't easily have access to traditional lending but who has contacts either in friends or family that would be willing to invest in their business may benefit from this option.

Return expectations
Friend and family members who have spare cash and are happy to invest in your business are less likely to want to secure a substantial return on investment. They may be more interested in supporting your venture to be able to see you succeed than in making any significant financial return, although ideally they would achieve both.

In the case of wealthy individuals who are specifically seeking investment opportunities the return on investment potential will play a critical role in whether you receive funding. As with syndicates and venture capitalists yours is probably not the only business they can invest in. It is anticipated that of all these interests some will succeed and some will fail and therefore there return expectations can be considerable as they are looking to offset the risk of the failures.

You have to consider however that investors would not consider a business if it did not have potential to make them a significant return. Even if they are spreading their risk in a portfolio they will never back a horse they don't believe could win. Therefore if you are able to garner investor interest you need to really consider if it's the right funding solution for you.

If you already have the expertise and manpower to make the business a success and only lack the funding it may be better to seek access to loan finance. If on the other hand you need external assistance or you may never reach your potential then selling part of your business to a relevant investor with the necessary experience could be a shrewd move.

As a guide a professional investor or business angel at the smaller end will be looking to recover at least 3 times their initial investment within a 3 - 5 year term. That's money you could have put in your pocket had you not needed to trade expertise for cash.

Advantages:

If the investor is a friend or family member they may not be looking for such large returns. So long as you return more than a bank or building society would pay in interest they may be happy.
If you know the investor you may have greater flexibility in returns.
The investor may not want to get involved in the running of the business.
If the investor is a professional then you will gain from his or her input and experience.

Disadvantages:

Friends or family and money can be a recipe for disaster. Make sure you formalise all the agreements and ensuring that everyone clearly understands the implications - including worst-case scenario.

You may need additional expertise in order to take the business forward and of all the investor options individual investors are more likely not to want to be involved in the business.

It's usually more expensive than conventional debt.

Where to find investors?