At this time, capital may be escaping from your business like water through a sieve. With many businesses experiencing something extreme changes in demand there is a need for short term capital to keep afloat until the current situation subsides. But with government loans taking time to process – many are also finding that they are not eligible.

What are your other options?

Angel finance is where a private investor loans money to a business, in return they may receive equity in the business or interest (in the form of a bond).

You can apply for business loans (which can be secured / unsecured), peer to peer lending or angel finance. Providing security lowers the rates on your borrowing – but also puts you at risk of losing the secured asset if you cannot repay.

Options for businesses in terms of lenders may be slim – but with angel finance there is more flexibility – particularly when it comes to late fees and term extensions – than you may get with banks or other lenders.

What are the benefits of Angel Finance?

A good thing is that if you were to borrow from someone you know, you can give them a return on their capital instead of giving that money to the banks in fees and interest. So it is a win-win – since saving rates are far lower than the inflation target (2%) at the moment – so money in the bank is literally losing value each day. Buying power of money in the bank has been eroding for years.

Fees disguised within various financial organisations mean that you would pay more in terms of fees than interest on some loans – for instance, the lending rate on Funding Circle is actually 2% – but the fees range up to 6%. Paying out fees of this magnitude just puts money into the pockets of financial institutions – then generally off-shore and out of the economy.

What should I be careful of with Angel Finance?

The person you are lending from – how much do they need this money? Are they able to spare the funds, even in the current climate? If they are may need the funds they may be more likely to pull the funds from you.

If this happens, then you need to ensure no interest is payable – a loan agreement should be in place to cover these eventualities.

Also the source of their funds – if you know this person then asking for an accountant to independently verify the source of funds can be done quite easily – just to make sure everything is above board.

Make sure that the interest promised can be payable through your future profits – defer the start of payments if you can; have an incrementally increasing rate of interest over the coming years and push out the repayment as long as possible. Angel finance is flexible and can help more than a bank loan on standard terms.

Finally your funds should be processed through a solicitors account if possible.

Overall

Angel finance is a great option, but always do your due diligence and make sure you don’t bite off more than you can chew. Take care with there interest rate you’re promising and keep in mind what is available on the market to investors. Now, more than ever, people will want to help small businesses where possible – an equity stake would be a sweetener in the deal to help secure much needed finance and means the investor then has ‘skin in the game’.

There are other things to consider with angel finance – part 3 will look at things you can do to secure an investor!