External sources of finance come from outside the business. Business Angels belong to external sources of finance. When businesses need to use the money in the long term (more than five years), this creates the need for long-term finance.
The amount of long-term finance needed for buying Fixed Assets, or Non-Current Assets, with a relatively low value such as vehicles will be small. While the amount of long-term finance needed for buying Fixed Assets, or Non-Current Assets, with a relatively high value such as new machinery for the assembly line will be large.
4. Business Angels
Sometimes all of us need our own angel. So do entrepreneurs who have interesting ideas that may change the world, but neither banks nor Venture Capitalists (VCs) consider funding them. Traditional lenders always require assets as collateral before lending any money while most Venture Capital (VC) firms focus on technology start-ups.
This is when Business Angels fly in handy.
Who are Business Angels?
Business Angels are informal wealthy investors who invest in high-risk and high-return entrepreneurial businesses at a very early stage. These businesses do not have any tested product yet or even a proven business model. But, what they have is life-changing ideas accompanied with high growth potential in the future.
Owners of start-up businesses who reach out to Business Angels for help will usually require large sums of money up to USD$500,000.
Benefits of having a Business Angel
While Business Angels will provide that kind of critical finance at beginning of the new venture development, along with bringing their knowledge, experience and connections, they will take a part of the business for themselves. It is because Business Angels are not in the business of donating money to charities.
They are intrinsically motivated and engaged to work together with the entrepreneur in the act of new venture creation. By taking the Business Angel’s money, the owner loses some ownership and control of his business to the Business Angel.
To sum things up, Business Angels can provide funding for businesses that have groundbreaking ideas, but are unable to secure long-term bank loans or are too small to attract Venture Capital (VC).
Business Angels will be proactively engaged in the setting up and running of the business venture bringing their wealth of experience and generously sharing their financial backing. By contrast, Venture Capital (VC) is typically a pool of professionally managed funds with more passive role in daily business operations.
