It is typically very uncommon for angel investors to make loans to small businesses. However, you can possibly receive both an equity capital infusion as well as debt financing from a potential private funding source if you structure the deal properly. Generally, any loan that comes from an angel investor is considered to be senior debt. The primary benefit of having this type of capital in your business is that you are able to raise debt financing without having to provide a personal guarantee for the loan. It should be noted, however, that in some instances a personal promissory note for the loan portion of your capital structure may be required. This should be properly negotiated when you are looking for angel investors.
Ultimately, the type of financing that we are discussing in this article is commonly referred to as royalty based financing. As such, you receive the capital that you need in order to launch or expand your business while concurrently being able to not sell as much equity in your business. If you are thinking about doing this type of deal with a private investment source then you should work closely with both your certified public accountant and your attorney so that all aspects of this investment are made clear to both you as the entrepreneur and the angel investor.
It should be noted that there are specialized firms that are able to provide you with subordinated debt as well as equity financing as it pertains to this matter. These companies are often referred to as royalty based financing firms. These companies take a smaller equity stake as well as recurring streams of payments that are based on how much revenue your company generated. As such, they are able to generate very high returns on a regular basis not only from your revenue but also through the capital appreciation in your company’s stock. If you have an ongoing business concern then we strongly recommend that you look into this debt equity hybrid vehicle so that you can get the funding you need without having to provide a significant amount of equity to an outside capital source.
Again, loans from angel investors are usually far and few between. These loans typically carry a number of loan covenants and you should be well aware of all of your financing options prior to working with this type of funding as the interest rates tied to private loans are usually very high.