If you need business finance but are not able to raise enough money through loans or other methods; then looking to outside investors is an increasingly common prospect for small and medium sized businesses.
Using an outside investor (often known as equity finance) means giving away a share of your business in return for finance and (usually) benefiting from the skills of the investor.
The two main types of investor are Business Angels and Venture Capitalists; the former are aimed at small and medium sized businesses, whereas the latter are usually aimed at large businesses or those requiring significant investment.
Business Angels
A business angel is an individual or member of a group or investment club who use their personal wealth to invest into businesses that show growth or profit potential. In return for their investment they take a portion of the business, with the intention of helping to increase the value of the business, and therefore increase the value of their stake.
Business angels usually utilise their skills and business contacts to help you achieve your business goals, and help ensure they get a good return on their investment.
The most commonly known business angels are the investors in the TV show Dragons Den; who use their own money to invest in businesses, and then use their personal expertise to help them grow.
A typical business angel will look to investments of between £10,000 and £750,000, obviously depending on their available wealth and the potential return of the business.
Advantages of Business Angels
Experience – A business angel will have experience, skills and contacts that they can use to help your business to succeed. They may also have experience in your local area, or even in your market.
Risk – Business angels are more likely to take on risky business prospects than other investors. They will still look at the business plan and the people running it and make a decision based on whether think it will give them a good return for their money. However, because business angels usually get involved personally; they are more likely to go for ‘challenges’ or risky ideas with lots of potential.
Personal Investment – As business angels invest their own money, they are likely to put in a large amount of effort to ensure they get a good return; and will normally invest only when they believe they can personally benefit the business.
Disadvantages of Business Angels
Business Equity - Business angels may ask for a large share of the business to help make sure their investment is secure; especially when the business is considered risky. This does have an upside however, as if the business angel owns a large chunk of the business, they are more likely to put the effort in to help it grow and reap bigger rewards! Remember that the larger stake an investor has in your businesses, the more say they have in the running of it
Regularity – Most business angels only take on investments on an irregular basis. This is because the money they invest is their own, and if they invest in too many businesses they will not have time to oversee each of their investments properly. This means that finding the right business angel who is looking to invest can often take a long time.
Personality – As a business angel will often work with you directly, they put a lot of thought into whether they feel they can have a good business relationship with you. If they believe there will be a clash of characters they will be unlikely to invest even if they think the opportunity is a good one.
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