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Does your small business need funding? Then you may be wondering whether angel investors or business loans are right for you.

There are many benefits of angel investors, but there are also times when business loans are the best choice. The right one for you depends on many factors, including your needs and preferences, the type of business you own, and the kind of funding you need.

In this guide, we’ll simplify things by showing you exactly how the benefits of angel investors and business loans weigh in. Keep reading so you can make the right decision to fund your business!

Your Small Business Funding Options

With major personal purchases like a house or a car, you can simply go to the bank and get a loan. The process is fairly straightforward.

However, securing funding for business purposes is a little more complicated than getting funding for personal items. There are many moving parts when it comes to business funding. While bank loans are available, they’re different from other types of loans, and might not always be the best choice.

Until fairly recently, there were only a few options for business funding. You could use your own money, run up personal credit card bills, or take a loan based on your home’s equity. However, all of these funding methods came with plenty of risks.

However, new technological developments and a new societal focus on entrepreneurship have led to an increase in funding options for small businesses. One major funding choice that doesn’t come with many risks to your personal finances is angel investors.

Angel investing has been around for a while, but it’s now more accessible than ever before. Let’s take a closer look at what sets angel investors apart from business loans.

What Are Angel Investors?

Angel investors are a special type of investor. They’re individuals who make at least $200,000 per year, or who have at least $1,000,000 worth of investment capital. Although this may sound like a small pool of people, there are actually hundreds of thousands of angel investors around the world.

When angel investors first got started, they were likely to reject the vast majority of businesses that approached them. They’d have to do as much as they could to make sure the business they invested in was going to work out, and many businesses didn’t make the cut.

However, today’s crowdfunding trends have opened up new ways to angel investors to give something to companies without putting themselves at risk.

What Are Business Loans?

Business loans operate more like traditional personal loans, although there are still some differences. To get a business loan, you typically have to have more documentation of things like exactly what you’ll use the money for, and how equipped your company is to pay it back.

The business loan is the more traditional option, but angel investors offer new and exciting possibilities. Should you get a business loan or an angel investor? Let’s take a closer look at the pros and cons of angel investing versus bank loans.

Pro: Angel Investors Take Risks

To get a bank loan, you need to prove that you deserve the loan and can handle it responsibly. Sometimes, that can be hard to do if you’re just starting out in business, or if you have a particularly innovative business idea.

However, many angel investors actually started out as entrepreneurs, so they’re more likely to understand the risks necessary for certain business ventures, and might be more likely to take on what looks like a risky investment.

Angels are also less likely to restrict how much they’ll invest. Some banks may give you the loan, but will restrict how much you can take in case it ends up being a loss for them. Angel investors will more quickly hand over large sums to help you get started. With an angel investor, it’s all about getting them to sense that your idea is viable, while with a bank you may need more proof to back it up.

Con: Angel Investors Have Higher Expectations

More risk means you’re expected to meet higher expectations, especially when it comes to angel investing. They tend to set a higher bar for success, while a bank will be satisfied if your business continues to be able to pay off the loan.

Angel investors need to earn money, too, and when they invest a lot, they expect to see a meaningful payoff. They might ask for a rate of return equal to 10 times what was originally invested, in as little as five years.

This puts a lot of pressure on your business to succeed and grow quickly. Before approaching an angel investor, you need to be sure your company can expand as quickly as they’ll expect it to. If you expect a more reasonable rate of growth, a bank loan is the way to go.

Pro: Angel Investors Don’t Give Loans

When an angel investor funds your start-up, they’re not giving a loan that you’re expected to pay back with interest. Instead, they get an ownership stake in the business in exchange for their investment.

Banks require you to pay off the loan whether or not your business grows. Angel investors will benefit alongside you if your company is a success, but if it fails, you don’t have to pay back the investment.

Con: You Don’t Have Total Control

Because of this system, angel investors tend to take a more hands-on approach to your business.

Banks give you the freedom to do as you please with your business, as long as you pay off your loans. Angel investors usually want a more active role in making choices about the company. At the very least, they’ll let you make the decisions but ask for explanations about each one.

Are the Benefits of Angel Investors Worth It?

The benefits of angel investors and business loans are equal, but different. The right one for you just depends on your specific situation.

Dougal Shand is a registered Financial Adviser, Managing Director and Founder of Admiral Finance in New Zealand. Prior to starting Admiral Finance, Dougal worked in New Zealand, the US and Europe, as both Audit Manager and Management Consultant for KPMG and as Financial Controller for Auto Credit Trust in London. Connect with Dougal on LinkedIn!

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