They are generally wealthy, entrepreneurial individuals who provide capital in return for a proportion of your company’s shares. Business angels take a high personal risk in return for owning part of a growing and successful business.
It is important to develop a personal relationship with the business angel, as they can bring more to a business than just money. An angel with the right skills can strengthen a business and cover any lack of experience.
In order to obtain their buy-in you must demonstrate a strong understanding of your product and market. Therefore, a good starting point is a well-constructed business plan with plenty of market research.
It is also important to show your commitment by detailing how much money you have placed in the business, or how much you will be investing once the business is underway. Also, detailing the management structure you have in place will improve your chances of obtaining funding.
Business angels can provide finance in a number of different combinations, such as a loan or providing a share of equity, though the usual terms mean they will always take an equity stake. This type of finance can be structured in a number of different ways and is usually dictated by the angel. The terms can therefore be either short term or long term.
Business angels often provide between £25,000 and £750,000. This type of investment is common when an early investment capital is required and when a business needs more than money. For example, perhaps you are trying to enter a new market and a business angel with relevant contacts or experience would be very useful. Choosing the right type of angel for your business is therefore very important. A good place to start is the British Business Angels Association (link at end of page).
There are four main direct costs that need to be considered:
- covenant compliance costs
- professional advice
- reporting obligations
- interest or equity payments.
Much of the initial cost will be incurred by the preparatory work. This would include grooming the company, obtaining key staff and having the right management structure in place. A business plan will form the cornerstone of any negotiations.
Legal fees will vary depending on if other services are provided, the complexity of the business, its size and risk to the lender. Legal costs will also depend on the stage of your business. For example, if you are established, the business angel may instruct a due diligence exercise prior to investing.
Fees to prepare management accounts will vary depending on whether other services are provided; bookkeeping, for example, and also on the complexity of the business, its size and the frequency of issue. A business would commonly be charged between £250 and £1,000 per preparation.
You also need to have an exit plan in place for the angel; it shows that there is a longer-term plan in place.
The timeframe for arranging finance from a business angel will vary, depending on the stage of readiness of the business. It is common for this type of finance to take more than three months to organise.
Timings will also depend on whether new security, new valuations or legal advice are required.
- raising finance in the form of equity strengthens your balance sheet
- it can lead to additional finance being made available from other sources such as banks
- business angels bring wisdom as well as money, such as how to run a successful business or an intimate knowledge of your industry.
- the high risk taken by business angels can mean a high annual return, 20% or 30% is common
- there must be an exit plan in place, allowing the angel to leave the business
- if a large amount of equity is taken by the angel it can lead to control issues, and the greater the equity taken, the greater the exit costs.
The right type of finance for your business section of this website gives examples of financial structures that are suitable for different trading types and sizes of business.
A loan can be used alongside a hedge or an interest swap, for example, to ensure that the cost of the loan is suitable for the business needs.
For short-term problems, such as managing your cashflow, an overdraft or business credit card may be more suitable options.
Where loans are used to finance assets, hire purchase or leasing should also be considered.