photo credit: Logan Antill
There are many risks involved when Early-Stage companies begin seeking loans from a bank; however, in order to understand the risks involved, one must understand what a bank really is. A bank is defined as a financial institution that accepts deposits and channels the money into lending activities. The Federal Reserve regulates institutional banks such as Bank of America, Wachovia, local banks etc. Due to these regulations, banks assure fair lending practices, protection of assets for those who have deposited money with them, and rates that can be charged to a borrower. Most people believe that debt financing only comes from banks like this, or institutional lenders, and that equity financing comes from private or institutional investors. With Angel Investing, however, there are many ways to participate.
Private investors can provide capital in a debt vehicle. This allows private investors to play the role of a bank, but without the fiduciary restrictions of operating under Federal Reserve Regulations. These individuals are labeled as investment bankers or dealers/brokers and are governed by the Security Exchange Commission (SEC). In most cases, Early-stage businesses are better off going with an investor governed by the SEC, because to the surprise of many Early-stage businesses, the web of requirements attached to loans guaranteed by the Federal Government quickly become a hassle. In fact, many Early-Stage companies can’t even qualify for loans due to an unanticipated shortfall of capital.
When a young company seeks traditional commercial loans early on, then important revenues and profit margins are used to service the loan instead of fueling the growth of the company. Therefore, it’s very important for Early-Stage companies to funnel all of that capital towards the growth of the business instead. If this is not done, then the consequences impact negatively on the company who is trying to grow and reach new milestones in its trek to attract private equity investments. Angel Investors can expect returns sooner through the form of debt than by making straight equity acquisitions. Private investment in the form of debt can earn a return of 10 to 40 percent, which works out incredibly well for the entrepreneur and the private investor.
Karen Rands is President and CEO of Kugarand Holdings LLC, a company that connects entrepreneurs with Angel Investors. Karen got involved in the world of angel investing in 2001. She left corporate world to join one of her clients as their VP and to help them raise their last bit of go-to-market capital. What she did discover is a whole new world of investing. As Karen Rands got more involved in the world of angel investing, she had requests from high net-worth men and women and their money managers to recommend training so they could learn How to be an Angel Investor. In 2003, Karen launched the Learn to Be an Angel Investor (http://www.howtobeanangelinvestor.com) ebook series. Thousands opted in to receive the original drafts. Finally, the first 5 books of that series are available to purchase at http://www.kyrmedia.com Karen Rands’ involvement in the world of angel investing grew with the acquisition of the Network of Business Angels & Investors (http://www.nbai.net) in 2005.
