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What Are Angel Investors?

Joe Schwartz

Joe Schwartz

Business Loans Editor |

Find out about angel investors for startups and small businesses image

If your startup or small business is in need of funding, angel investors might be able to help.

But, who are these angel investors and why would they give your business money? If you’re curious to find out more, this article will give you some information about angel investors, what they are, how they can help, and, what are some of the pros and cons.

What Are Angel Investors?

Angel investors provide a reliable source of financial support to allow your business to thrive. The term “angel investor' refers to people who choose to invest in start-up businesses. These individuals are usually entrepreneurs who can recognize a good idea when they see one.

Sounds great, but what’s the catch?

By contributing a certain amount of funds to a company, in return, these angel investors will gain co-ownership or stakes within that business.

So why do they want to invest?

By providing partial funds to a business they, in turn, will share any profits made from that company of an agreed percentage. For example, if you have a company that is in its infancy, an angel investor could invest between $25,000-50,000 to help you with growth and development costs. If your great idea succeeds and your business booms, angel investors expect their initial funding covered plus a certain percentage of all future profits made. Moreover, an angel investor can serve as a credible option for new business owners who don’t yet qualify for a business loan.

How Can They Help Small Businesses?

As mentioned, angel investors can help both startups and small businesses to thrive and grow through partial funding. Once angel investors drive finance into a business, they gain co-ownership As such, they wish for the company to succeed so that it makes their investment worthwhile.

If the business does well, angel investors receive a percentage of the profit, therefore, increasing ROI. Angel investors will then do all they can to contribute to the success of that business as they want to see it do well.

Often, these individuals are involved in a network of additional investments and relevant marketers who can assist you in the development of a successful marketing strategy to drive profits, an essential element for businesses that are just starting off. So if you want to benefit from an additional, genuine interest in your business, angel investors are worth considering.

How Do they Differ from Business Loans?

A business loan offers companies money up to a specific amount, depending on their credit history. Upon approval of a business loan, both parties sign a contract which indicates the amount of time a business must pay back the loan in full with interest rates applied.

Do you have poor credit or lack any credit history? APR can often be high, meaning that the business ends up paying back a lot more than the initial loan. Keep in mind, too, that not everyone will qualify for a business loan due to damaged credit or other validating reasons.

That's where angel investors step in to help.

With regard to the differences between the two, angel investors contribute funding to a business because they believe in the success of that company and want to see it succeed.

On the other hand, business loans come from an external source with no invested interest in the company, so long as the borrower makes their monthly repayments in full and on time. They play no role in the growth and expansion of a business.

Pros of Angel Investors

Businesses can benefit in many ways from an angel investor. Let's explore their potential:

No interest fees or monthly repayment schemes apply since angel investors determine to invest on their own free will. If your business kicks off, great! You will both benefit. If not, you are not entitled to pay back the angel investor.

No limit on funding. Unlike business loans, angel investors do not cap the amount of funding that you can receive from angel investors. That means you can qualify for as much money as the investor is willing to invest.

Angel investors are risk-takers. There is no guarantee that the business that these angel investors drive capital into will succeed. These entrepreneurs take risks with a 50/50 chance of success. Their analytical skills allow them to make decisions based on how well they think certain companies will do based on current and future market trends.

Genuine Interest. Angel investors will only invest in businesses that they believe can generate a high ROI. Once they contribute funds to an idea, they will support this through its entire journey and do all they can to help the venture succeed.

Multiple investor networks. Not only will businesses receive generous funding, but they also gain other types of support from angel investors. These investors usually belong to a network of other investors who may also wish to contribute additional funding to the startup.

Promote Awareness. Due to the nature of angel investors, they are often connected with successful marketing individuals who know all the ins and outs of promoting a new product and enhancing productivity.

Cons of Angel Investors

Angel investors make sense for some but come with certain disadvantages. Let's explore the downside of using an angel investor for your business:

Loss of control. What may have started off as completely your own idea now becomes partially owned by the angel investor(s). If you choose to accept finances from an angel investor, they legally own part of your business. For this reason, make sure that you can trust the angel investor and understand their reasons for wanting to contribute to your company. After all, once they become part of the business, they will likely discover elements and information about your company that only those who you can trust should know.

High expectations. The more someone invests in an idea, the more they expect to receive in returns. Some angel investors even set a time period in which they expect returns on their initial investment over a set amount of years.

Future earnings. If all goes well and your business booms, you will not bask in all its glory alone. From the second that an angel investor contributes their share of funds to your company, any future success becomes partially theirs also. So make sure you are happy with the agreed percentage that they will own of any profits made from your business. Angel investors tend to be quite tedious and will want to see hard evidence of all earnings of the company to make sure they are receiving all that they are entitled to.

Key Takeaways

Overall, choosing whether or not to incorporate an angel investor into your business can prove both a risky and rewarding step. As the saying goes, “The biggest risk is not taking any risk.” By accepting money from a trusted investor, you could substantially grow your startup into a thriving enterprise.

Keep in mind some of the cons of angel investors. By bringing in investors, you give up partial ownership and control over the company. Angel investors may also impose restrictions or performance benchmarks.

It comes down to weighing the pros and cons in your business’ particular financial situation. Compare private business loan options with angel investors first before deciding which route to take.

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