This article are provided for information purposes only, and are not intended as legal advice.


Angel investors vs venture capital vs bank financing

May 6th, 2009

You are operating your business and you are getting short of cash, what do you do?  You can look for an angel investors, venture capital or bank financing.  If you are able to obtain bank financing, this is the cheapest method of getting financing.  You may be paying a high interest rate depending on your circumstances, more than you believe is fair however, you did not give up any equity in your business.  That is worth a lot.

 

If the banks do not lend you money and you have no family or friends who can provide you money, then you need to look at alternative sources of financing – angel investors and venture capital.  In reality, both are the same thing however angel investor usually refers to individuals who are willing to gamble and provide you risk money for your venture.  For providing this risk money, they want a high rate of return which could be monthly loan payments plus they take a large amount of equity in the company.  Many angel investors are smaller investors providing $25,000 in capital and up.

 

Venture capital firms on the other hand are funded from pension funds and various large capital players.  They tend to lend larger amounts of money to one company.  Some will look only at financing of $500,000 and up, many only look at ventures looking for millions of dollars of working capital. 

 

The information which you need to provide each is very similar, historical financial statements, projections, business plan etc.  Angel investors and venture capital firms tend to finance things going forward and are not willing to provide working capital to pay for past invoices not paid or to repay any shareholder loans.  They want their money to be used for expanding the company, not paying for past mistakes or lack of funding in the past. 

 

All three require reporting, all three probably require monthly financial statements, the angel investor and the venture capital firm may limit your purchases and make sure that you adhere to budgets which you prepared.  The amount of reporting and restrictions of the business are significantly higher for angel investors and venture capital firms vs bank financing.


Filed under: Financing — Gary Landa @ 12:48 pm


1 Comment »


  1. Great post. For people looking for a loan it’s important for them to realize they have more options than just the bank.

    Comment by Jack Zufelt — May 7, 2009 @ 9:17 pm


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