21 Oct 2020, 12:32 — 3 min read
Every SME that seeks funding for their business has two main options – borrowing loan from financial institutes (including Bank) or seek private equity investment, which essentially involves selling a portion of your business in exchange for capital. The latter is also referred to as angel investing. But the term ‘angel’ may in fact be a misnomer. Let’s examine why.
A Bank is an incorporated entity under a relevant act. The lending is carried out through a set of business rules and is governed by a governing body—the RBI in case of India.
Angel Investor(s) are individuals who supply funding to early stage startups in exchange of an equity position in the company. Therefore, in comparison, a loan from a bank is not basis the decisions of an individual, but rather based on established rules defined by the bank and transparent laws laid out by governing authorities.
Banks extend an interest on a specified loan. They are not looking for profits from the company but to gain income from the advances/loans made to the company and timely recovery of the principal.
Angel investors on the other hand are mostly keen on earning profits from the company. In lieu of their investment, they might seek high stake in the company and its profits.
Banks take no interest in the day to day running of the business as long as the loan is paid back duly. Angel Investors may seek greater control on business which can lead to conflict of interests if such terms are not clearly articulated. Therefore, the primary disadvantage of an angel investment is loss of complete/partial business control for the SME. Moreover, there is likely to be no exit plan on when an SME can gain back ownership once surrendered.
Banks may offer special loans and lower rates for SMEs. Angel Investors may not have such specialised criteria.
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Note: While there are other mediums of arranging funds, only the above two options are considered for the article.
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Posted byGlobalLinker Staff
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19 Jul 2021, 10:43