Should your business make use of angel investors?

Angel investors can be a big help to small businesses, says David Prosser. But there are downsides.

947_MW_P22_small-biz

Angel investors can be a big help to small businesses, but there are downsides.

If your business is looking for financial support, should you consider "business angel" finance? More than 15,000 angels typically wealthy individuals and serial entrepreneurs are now active in the UK, responsible for several thousand fundraising deals each year with small businesses.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

The figure is increasing, according to the UK Business Angels Association (UKBAA), as part of a broader trend towards ethical and socially responsible investment. Many angels feel a responsibility to support the next generation of wealth creators, says Jenny Tooth, CEO of UKBAA.

For businesses raising money, angels offer a number of advantages. They provide equity finance rather than debt, so they don't saddle the business with repayments or the cost of interest, or require any security. Acting individually, rather than as part of a larger corporate entity such as a private equity or venture capital fund, they can often make decisions more quickly. And since angels tend to invest in businesses in sectors where they have particular experience, they will often bring a wealth of sector knowledge and crucial networking opportunities.

Advertisement
Advertisement - Article continues below

However, there are some potential drawbacks too. Equity investment means giving up some of your business diluting your ownership, which will mean you receive less value if and when you sell it. You'll also be giving up some control. Angels won't necessarily demand a majority stake in the company, but they will expect a say in its running.

Some angels, moreover, are in a position to offer more support than others. Private equity and venture capital funds are more likely to be able to help with structural support helping you formalise the governance of the company or move it on to a sophisticated technology platform.

Angels aren't charities

Nevertheless, business angels have a long record of adding value to many of the enterprises they support, and the alliance up can be a powerful catalyst for growth. Angels typically invest between £10,000 and £500,000, though larger investments are possible. They'll often look to set up the investment so that it qualifies for the enterprise investment scheme (EIS) or seed enterprise investment scheme (SEIS), two government schemes offering generous tax reliefs to investors in unquoted companies. This may require entrepreneurs to structure their financing arrangements to meet the EIS or SEIS eligibility criteria.

Advertisement

Recommended

Visit/520095/where-to-find-funds-for-your-firm
Small business

Small business: where to find funds for your company

There are plenty of potential sources of money to help your startup business flourish, says David Prosser.
7 Jan 2020
Visit/520124/money-makers-julian-metcalfe-a-215m-fortune-from-sarnies
Small business

Money makers: a £215m fortune from sarnies

Julian Metcalfe, founder of Pret A Manger, made a fortune from transforming the way the country eats lunch.
28 Dec 2019
Visit/520100/five-questions-for-markus-stripf-of-spoon-guru
Small business

Five questions for: Markus Stripf of Spoon Guru

Spoon Guru helps people find the perfect foods for their dietary needs and health objectives.
27 Dec 2019
Visit/519469/get-your-business-ready-for-ir35
Small business

Get your business ready for IR35

IR35 – the tax rules distinguishing freelancers from employees – are getting tougher. Here's how to make sure our business can cope.
18 Dec 2019

Most Popular

Visit/economy/600632/money-minute-friday-17-january-uk-weakness-likely-to-continue
Economy

Money Minute Friday 17 January: UK weakness likely to continue

Today's Money Minute previews UK retail sales figures the UK, inflation data from Europe and industrial production from the US.
17 Jan 2020
Visit/investments/property/house-prices/600638/uk-house-prices-may-be-heading-for-a-boris-bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600636/class-acts-going-cheap-buy-into-europes-best
Share tips

Class acts going cheap: buy into Europe’s best bargains

Value investing appears to be making a comeback, while shares on this side of the Atlantic are more appealing on metrics such as price/earnings ratios…
16 Jan 2020