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Angel Investment vs. Small Business Banks and Loans

Banks traditionally have provided loans for small businesses in need of capital investment for new equipment or purchasing real estate, for example. In exchange for financing, banks generally require significant collateral and usually only loan to companies at least a year old and have incoming revenue.

And banks generally are much more conservative with their investment dollars than angel investors which makes their potential to invest in startups more difficult as startups especially those which are high risk and unproven don’t have collateral, customers or a track record they can point to. Banks do not want to take equity risk in your company especially without getting upside that may come from being an equity owner.

For those businesses with collateral, bank financing may be more viable. Collateral may include:

  • Hard goods such as equipment;
  • Real estate;
  • Stocks or bonds;
  • Other personal assets;
  • Personal guarantees.

Banks lending to small businesses generally want the same kind of answers that an angel investor will ask, and look for details from the business plan on how they will be paid back and how long it will take. A lender wants to know:

  • Exactly how this business will operate and why it’s expected to make money;
  • Exactly how the money will be used;
  • How you plan to repay the loan and over what time frame;
  • That you’re willing to take a significant financial risk in the business;
  • That you’re responsible and can manage this business;
  • Who else is involved in management or operations, and that they will also be responsible for the proper use of the money from the loan.

Currently, the federal government, looking to stimulate the national economy in face of the downturn, recently has provided incentives for banks to start backing small businesses again.

As part of the stimulus, the Small Business Administration (SBA) guaranteed $16.5 billion in loans to small businesses, as part of $325 million included in the Recovery Act in February 2009. Please review the Brain’s Guide to SBA Financing for more information on SBA Financing.