Angel investors may say yes when banks say no

by | Sep 14, 2018 | Firm News

Entrepreneurs in Ohio and around the country sometimes turn to angel investors after trying unsuccessfully to obtain funding from traditional lenders. Angel investors, like venture capitalists, tend to take a more liberal approach to risk assessment, but they generally expect the loans they make to be repaid within five years. While the interest rates charged on loans not obtained from conventional sources are usually high, angel investors and venture capitalists often provide business owners with valuable advice and coaching in addition to financing.

Many angel investors choose to only make loans to companies that operate in business sectors with which they are familiar and have a demonstrable track record of success. This means that they can provide entrepreneurs with the benefits of their experience, but it also means that they may be unimpressed with business ideas that have not been properly developed or rely on questionable assumptions.

Entrepreneurs may be able to avoid such situations by focusing their presentations on business fundamentals rather than their unique selling propositions. Angel investors will likely have heard many business owners speak enthusiastically about new opportunities created by changing market paradigms, but they are more likely to be moved to action by individuals who have done their homework, have a competent and dedicated team in place and are realistic about the challenges that lie ahead.

Angel investors sometimes make loans using convertible notes that can be converted to equity in the company at a later date if certain financial or sales milestones are reached. Attorneys with experience in this area may advise entrepreneurs presented with this kind of financing to proceed with caution. This is because angel investors can choose to be paid in cash instead, and entrepreneurs may find it difficult to find lenders willing to advance funds that will be used to pay off a previous investor.