If you’re a small or mid-sized business exploring potential business funding sources, then you’ve likely heard of “angel investors”. And really, with a funding partner that shares a name with a heavenly being that glides around spreading love and performing miracles — how can you go wrong?
Well, not that we want to pour cold water on anyone’s inspiring business funding journey (hey, it’s always important to think positive!), but to be blunt we’ve lost track of how many business owners over the years have told us that their angel investing dream turned into a lingering nightmare. And here’s why:
Angel Investors are NOT Angels
Angel investors are NOT – we repeat, NOT – superior beings who, out of a sense of nobility, feel an obligation to go around and provide business funding to worthy recipients. This isn’t to say that angel investors are unethical or behave improperly; because the vast majority of them are legitimate and above board. But the notion that their motives are altruistic or even spiritual (as the name implies) is 100% myth – and any angel investor worth her or his wealth will be the first to admit this.
Angel investors, like all other investors, are motivated by PROFIT. And provided that a prospective angel investor determines that your business is profitable – and as such you’ll be able to pay back the loan in full and on time – they might be willing to loan you the cash you need.
Sign Here…and Here…and Initial There…and There…
But even if you manage to attract the attention of an angel investor – and this is a big if, since there are LOTS of competition out there — if you’re expecting to seal the deal with a handshake or a smile (as one might expect with an angel), then think again! You’re going to be presented with an iron-clad contract that rivals anything your bank would submit for several of your signatures and initials.
What’s more, you should expect the loan term to be short – because most angel investors have no interest in hanging around for years and years while your business grows. And so there’s a limited window for you to generate business profit and pay back your loan.
And speaking of interest: unlike the “no interest” in the paragraph above, of course there’s going to be an interest amount charged; and it’s going to be higher than your bank (which stands to reason). Plus, if you borrow more than you actually need or find yourself in the fortunate position to pay the loan back early, then you shouldn’t expect to get a break on interest costs.
Remember: your angel investor will have incurred an opportunity cost by lending their cash to you vs. lending it another business owner. And while they might be impressed that you can pay your loan back early, unless it’s explicitly allowed in the contract (which is very unlikely), they aren’t going to accept a small interest payment. So in other words: you can pay your loan back early if you can or want, but expect to pay 100% of the agreed upon interest.
Ultimately, we aren’t saying that you should steer clear of angel investors. Rather, you should simply go into any potential funding arrangement with your eyes wide open. Angel investors are simply private, wealthy investors with a lofty label. The legitimate ones will even tell you this right off the bat. They aren’t superheroes, and they don’t want to be paid back in thank you cards or pats on the back. They’re VERY shrewd and successful business people who leverage their money in order make more money (or at least try to). It’s really that simple.
Call Mulligan Funding at 855-326-3564 to discuss your financing options today!