Is an Angel Investor Right for Your Business?

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As an entrepreneur, you are inherently a risk-taker. Starting and running a business is not for those who only play it safe. But like almost everything in life, risk is on a continuum. There is lots of distance between carefully weighed risk and recklessness. “Carefully weighed” risks are optimal.

Many small business owners consider taking on funding as a necessary risk to grow at their desired rate, since they need more cash than they can invest personally.  Before enough revenue starts rolling in to cover costs and produce a healthy margin, businesses need to invest in expenses like research and development, materials, staff, marketing, or operations – and most likely, a combination of those factors.

Traditional options for funding are commercial (bank) loans and government-backed loans, such as Small Business Administration (SBA) loans.  Another option is to come to an agreement with one or more angel investors.  These are private, high net worth individuals who are willing to take risks on businesses they believe will succeed.  Make no mistake though: Angel investors are in it to earn money at a higher rate than traditional investments, and they typically require equity ownership in the company and expect returns via company profits of 25% or more (such as what you see on the aptly-named TV show, Shark Tank).

Here are a few pros and cons of acquiring capital through angel investment:

Pros:

  • Debt financing has to be paid back (with interest), but if the business fails, angel investments typically do not have to be repaid.
  • Angel investors are willing to take risks on companies in which they see potential.
  • Most angel investors are experienced and successful business owners who offer their expertise in addition to funds, as well as other bonuses like investor networks and supplier and distributor contacts.

Cons:

  • Because angel investors typically require equity ownership, they can expect to play more of an active role in the business.
  • As part owners, angel investors are entitled to a share of profits.  Handing over equity in a company is basically handing over part of your future net earnings.
  • Relationships with angel investors are typically more personal than with venture capitalists.  Business challenges can have a negative impact on those relationships.
  • It can be difficult to find angel investors.  They can be friends or family, but many are found by word of mouth and through business associations or networking, such as the local chamber of commerce.
  • Angel investors are usually looking for a higher rate of return than traditional debt financing from a bank, although not as high as venture capitalists.

Many angel investors and business owners develop mutually satisfying, long-term relationships.  Success depends on detailed business planning, extensive upfront communication and documentation, formalized legal agreements, and then ongoing communication and relationship management.  With solid planning and communication, using angel investment to fund your business can be an effective risk that accelerates your business growth.

Contact us if you would like us to help you determine if angel investment is right for your business.

The Numbers Coach Assists in Capital Acquisition for Company Buy-Out

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SITUATION

In 2004 Pain Consultants of Atlanta, LLC (“PCA”), a leading pain management medical services firm, entered into an agreement where key leadership would purchase their division from their parent company.  PCA management needed to find the right type of financing to ensure a successful buy out.

SOLUTION: The Numbers Coach Financial Leadership Services

PCA turned to the Numbers Coach (“NC”) to assist with finding the right financial partner to execute the buy out. NC compiled a loan report that included detailed financial information and projections. The loan report told the PCA story, its vision for the future, and why it was a good deal for a financial partner.  Since the historical financial data was strong and accurate, and the projections realistic, PCA had several options available to them.

RESULTS

NC helped PCA management evaluate and determine the most appropriate financing options and terms to meet their objectives.

  • PCA received several competitive term sheets to evaluate.
  • Financing was timed to meet necessary deadlines for the buy-out.
  • A working capital line of credit was also secured to provide adequate financing for growth

The Numbers Coach Helps Secure Interim Financing for Practice Expansion

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SITUATION

In 2004, Pain Consultants of Atlanta, LLC (“PCA”), a leading pain management medical services firm, was in the process of negotiating a buy-out from their parent company. PCA saw an opportunity to grow by opening a new clinic in Atlanta, Georgia, but was unsure about expanding prior to the completion of their buy-out.  The management team determined that they needed to secure interim financing in order to move forward with the expansion.

SOLUTION: The Numbers Coach Leadership Services

PCA engaged the Numbers Coach (“NC”) to assist them in securing interim financing that would allow the company to continue on their growth path without requiring a large capital infusion.  They also needed to structure the financing in a manner that conserved cash flow during a crucial buy-out transition period.

RESULTS

NC helped PCA to obtain approximately $300,000 of short-term lease/purchase financing from several different financial partners.  This enabled PCA to continue its expansion during the interim period before the actual buy-out occurred.

Back to Banking Basics

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by Anne Moore Odell

Is that a ray of sunlight peeking through the economic clouds? Yes, banks are still lending to small businesses. True, loans aren’t as easy to secure as they were three years ago. But businesses that are willing to work to show their ability to repay lines of credit and loans are still getting financial support.

“Things are starting to loosen up,” says Mike Iverson, CEO of Trillium Financial. “Bankers are opening their doors again.”

Banks are getting back to the basics of lending. As a business owner, this means you need to re-familiarize yourself with these basics and make sure your business is ready to request that loan.

Sailing through the Five “Cs”

The “Five Cs” of business credit are more than a banking concept learned in business school. As banks pull back their lending reins, they are investing more time to learn about their clients’ businesses before lending.

“Banks are really looking at lending from a basic banking process,” explains Iverson. “They’re not going to take the same risks they were before. Banks are monitoring loans downstream. Before, some loans were unmonitored, but as businesses want to renew their loans, many banks want to see more information on a more regular basis. You’ll be hard pressed to see unmonitored loans of a million dollars anymore. Even much smaller loans are being monitored quarterly.”

With your business loan application in hand, the bank’s lending committee will examine how well your business can repay its loans according to five critical factors:

  1. Character. The lender is looking at you both as a business owner and a manager. Your character includes your personal financial history, reputation, and, importantly, your relationship with your lender.
  2. Collateral. Both business and personal collateral. More banks are asking for business owners and partners to sign personal guarantees so that loans are secured at an acceptable margin.
  3. Capacity. More than ever, banks require you to demonstrate your capacity to repay the loan. Although the recession has changed and often slowed down cash flow, lending committees must be convinced that your business has the liquidity and cash to repay on time.
  4. Capital. By supplying current, in-depth and correct financial information to your bank, a lender can understand that your business has the capital structure to survive and thrive in these tough economic times.
  5. Conditions. You also need to show that you understand the conditions of your industry, the economy and other factors that could impact your ability to repay the loan.

Communication is Key

Be upfront on your application and honest with your banker on where and when risk could occur. Communicate your business plans and clearly explain to your banker how you plan to use the borrowed funds. Once you have your secured your loan, keep the lines of communication open between yourself and your banker.

“If you have bad news you need to tell your banker ‘here is the issue, here is how I plan to address the issue,’” says Iverson. “If they get surprised, they get worried.”

Filling out a loan application and talking to your banker shouldn’t be an angst-filled experience. The irony is that when you don’t need a loan, when your cash flow and income are high, it is the best time to apply for one. “You get the loan, you use it, you pay it back it back, and you show the bank that you have the management and cash flow to do it,” adds Iverson.

Even in these tough times there are lenders ready to loan money to well-run businesses. Remember the five “Cs” and always communicate with your banker in good times and bad times.