BUSINESS LOAN VS ANGEL INVESTORS
Whether to fuel expansion or overcome temporary cash flow dips, almost every business seeks extra funding at some point. Small and medium-sized enterprises (SMEs), in particular, can find themselves in need of cash injections, especially during their start-up phase. However, financing isn’t always easy to locate or afford.
Banks and other lenders often ask for forecasts of steady revenues to ensure their money will be repaid. Facing this, new businesses often turn to individuals – so called ‘angel investors’ – to supply funding if conventional lenders prove inflexible.
So what’s the best option for an SME: a regular Business Loan or cash from an angel investor? In this article, we examine both while also suggesting a more realistic possibility: a Flexible Repayment Loan from GRID Finance.
Understanding the importance of SMEs to every Irish community, GRID Finance has developed this option specifically with them in mind. According to the CSO, SMEs (firms employing fewer than 250) accounted for 99.8% of all enterprises operating in Ireland in 2021. So their importance to local economies is undeniable – and it’s why GRID is proud to support this vital sector.
Understanding Business Loans
Before examining the pros and cons of Business Loans and Angel Investments, it’s worth reviewing the basics of each. While different lenders will have their own rules and conditions, some general elements characterise the two different forms of funding.
What is a Business Loan?
A Business Loan is funding that’s typically borrowed from a bank or other lender for a specific purpose. This can be to drive growth (for example, to expand facilities, purchase equipment, or acquire vehicles), cover temporary cash flow gaps, or seize an unexpected opportunity.
Business Loans are either secured or unsecured. Secured loans are tied to business assets like property or machinery which lenders can claim if the loan isn’t repaid. In contrast, unsecured loans lack collateral, which makes them riskier for lenders. As a result, unsecured loans often carry higher interest rates.
Pros and cons of Business Loans
The benefits of Business Loans are clear: they can provide quick and straightforward funding whenever, and for whatever, it’s needed.
However, there are potential downsides. Variable-rate loans, for instance, can add financial strain if rising interest rates lead to higher repayment costs. Not keeping up with repayments can damage a business’s credit rating, making future borrowing more difficult. Additionally, defaulting on a secured loan may result in the loss of any assets used as collateral. Careful planning is crucial to avoid these pitfalls.
Exploring Angel Investments
Surprisingly, the term ‘angel investor’ didn’t originate in the financial world. A century ago, the term ‘business angels’ described wealthy individuals or private investors who provided last-minute funding for theatrical productions in danger of closing.
Today, many angel investors operate in less glamorous sectors, but fulfil a similar role to their Broadway forerunners by providing much-needed capital in exchange for equity in your business.
What are Angel Investors?
SME owners looking for investment must typically negotiate with institutions such as banks or venture capitalists. An angel investor brings a far more personal dimension to this scenario.
Typically, an angel investor is a wealthy individual who offers their own money to help launch or grow a business. Very often, money isn’t all they bring to the table. Angel investors can also offer invaluable mentorship, contacts and sector expertise.
In exchange, they usually look for an equity stake, in the hope that their investment and guidance will help put the business on a fast track to success.
Pros and cons of Angel Investments
Every source of business funding comes with its own advantages and disadvantages, and angel investment as a potential type of funding for your business venture are no different.
On the plus side, they can be more flexible than other lenders. Rather than ask for repayments that start immediately or follow a strict schedule, angels can be more relaxed in waiting for a return.
Of course, this depends entirely on the individual angel and some may be less patient than others. Angel investors may also share valuable expertise in the relevant sector. This can be a double-edged sword, as some may create friction if they seek to steer the business in a different direction to the founders’ vision.
Another negative for business owners and their management team to consider is potential loss of control. If equity must be diluted when bringing angel investors on board, it’s important that founders retain as much control as possible.
For start-ups, this can be a challenge since they may not have any other source of funds. Saying this, it’s possible that an individual angel investor may not be able to afford all that’s required. If others have to be found, co-ordinating the needs and demands of multiple investors can become very complex.
Comparative Analysis: Business Loan vs Angel Investors
Funding decisions can have long-term consequences for businesses. For this reason, no venture capital choice should be made without carefully comparing the pros and cons of each option, especially if they affect the business’s ownership structure.
Key Differences
While both deliver funding to help businesses grow, there are clear differences between Business Loans and Angel Investments. The most obvious are the repayment obligations.
Standard Business Loans usually set a fixed repayment schedule that must be met, regardless of how the business is actually performing. Understandably, this can add financial pressure at times when it’s least welcome.
On the other hand, most angel investors expect to acquire equity, meaning they won’t look for regular payments. Saying this, angels can have high expectations about the eventual return they will receive. This situation can also place the business’s managers under pressure to grow at an unrealistic pace. However, they may also be able to ask their angel investors for mentoring, something that standard loan providers wouldn’t usually offer.
Scenarios where each option is suitable
In general, Business Loans are most suited to situations where funding is needed for a specific purpose. For example, if new equipment was required to help the business operate more efficiently, an opportunity arose to purchase stock at a very attractive price, or costs needed to be covered during a temporary cash flow crunch.
In situations like these, it would make little or no sense to give away a share in the business to secure funding.
On the other hand, offering equity may well be necessary if a business hasn’t yet developed a regular revenue stream from which it can make loan repayments. Regular lenders may not be willing to offer loans in these cases meaning angel investors are the only realistic option.
A common scenario would be where a start-up needs an injection of funds along with technical input when developing a prototype; here, a single angel investor might offer both.
Financial considerations
Whenever an angel investor is a possibility, other important factors besides the financial dimension come into the equation for early-stage companies and established firms alike. It’s vital to carefully weigh up the financial implications, risk tolerance factors and the growth potential of Business Loans and Angel Investments before choosing either.
Impact on cash flow and ownership
More than anything, the difference between Business Loans and Angel Investments is highlighted by their respective impacts on cash flow and business ownership.
As regular repayments are demanded by Business Loan lenders, borrowers must have relatively predictable revenue streams. In contrast, angel investors won’t make regular payment demands. This reduces the initial financial pressure on those receiving funding. However, angels will eventually expect to receive dividends, and see the value of their equity rise.
Unlike regular lenders, angel investors share in the company’s ownership. This can be a positive outcome if the angel also contributes expertise and helps to open doors and create business opportunities. However, it’s not uncommon for founders and their investors to clash.
One high profile example in recent years involved the founders of the dating app Tinder having a very public falling out with Barry Diller, the TV and film producer who has invested in many global internet successes.
Terms and conditions: what to expect
Every form of business funding comes with its own distinct terms and conditions. While individual lenders and angel investors may impose their particular requirements, some rules and conditions come as standard.
The most obvious obligation with any Business Loan is to make regular repayments. Generally, these are a fixed amount payable on a specified day each month, no matter how the business is performing at that time. Interest rates may be fixed or variable, depending on the loan. If the loan is ‘secured’, you will be asked for collateral which could be seized by the lender if you default for any reason. Rules could also apply to your business’s creditworthiness, trading history and general financial stability.
Very different terms and conditions come into play with Angel Investments. Since equity is usually exchanged for funds, a shareholders’ agreement needs to clearly outline the rights and obligations that apply to the business’s owners. For example, voting privileges, entitlements to dividends, dilution protection (which safeguards the size of the stake held by each investor) and rights to sell shares are just some of the issues that an agreement must cover.
How to choose what’s best for your business
The choice of business loan, angel investing (or neither) is one of many important strategic decisions you’ll make as a business owner.
Once you clearly understand the differences between Business Loans and Angel Investments, you need to decide on your best option. In this section, we’ll examine some important factors to bear in mind as you look to scale business growth.
Assessing your business’s financial health and goals
To make the right decision, you must first realistically assess your business’s current financial situation and future goals. The most fundamental factors to consider are revenue and profitability. Analysing income streams, liquidity ratios and profit margins in detail will paint a clear picture of your business’s sustainability.
Looking at the business’s debt levels, assets and liabilities will add more depth to your understanding. Beyond these metrics, you also need to consider growth forecasts, expected market conditions and your overall appetite for risk.
All in all, there’s a lot to consider. But doing so is essential in order to make a decision that’s right for the business in the short and long term.
When to choose GRID Finance products
If you finally decide that a Business Loan is the best funding option but aren’t sure about committing to fixed monthly repayments, GRID Finance’s Flexible Repayment Loan may be an ideal solution.
This offers up to €500,000, with flexible repayments calculated as a percentage of average weekly sales. Consequently, repayments are lower during slower periods and increase as sales improve. As a result, your business won’t experience unnecessary pressure if cash reserves are tight.
Application process and requirements
You can apply for a GRID Finance Loan of between €10,000 and €250,000 if your business is registered in the Republic of Ireland, has traded for over nine months and uses card machines or an online payments processor to take revenue. Just follow the steps outlined below:
Steps to apply for a Business Loan
If you’ve decided to apply for a GRID Finance loan, your first step is to set up a GRID loan account online, then upload six months of recent bank statements. Alternatively, you can supply a read-only Open Banking Connection. A valid tax clearance certificate from Revenue is also needed.
Once you’ve done this, complete the declarations and submit your application. If you are borrowing a large amount, we may also need audited financial accounts and management accounts from you; if you want to borrow more than €250,000, we’ll discuss what’s possible.
Following this, approval usually takes around 48 hours and if your application is successful funds should be transferred within 24 hours.
Preparing for angel investors: what to prepare
Far more preparation is needed if you aim to attract angel investors. You will need to prove your business’s potential, that the core idea is solid, a market exists and you have access to the skills and resources necessary to succeed.
This means you must have a solid business plan, accurate financial documentation and a persuasive pitch deck. To be compelling, these materials have to clearly outline your vision, market analysis, competitive edge, financial projections, and growth strategies. In particular, you need to tell an investor how much you require, how it will be used, and how much equity you are offering in return.
The GRID Verdict on Business Loans vs Angel Investment for Your Business
To summarise, Business Loans and Angel Investments are both realistic funding options for SMEs, albeit with very different advantages and disadvantages.
While a Business Loan is relatively straightforward to arrange, rigid repayment schedules can add unwelcome financial pressures. On the other hand, potential investors can supply invaluable funding, advice and networking opportunities – if founders are willing to hand over a percentage of their equity.
SMEs can avoid both of these outcomes by opting for a flexible GRID Finance loan which bases repayments on recent revenue.
Not surprisingly, more and more businesses right across Ireland now opt for this solution – a solution developed from a deep understanding of commercial realities and an appreciation of how much SMEs do to enhance everyone’s lives.
