Angel investors do not typically compete with small business loans because these companies would not in a million years get money from a bank.
Angels invest exactly in those that can not get money from banks because they are too high risk.
Once a business is established and has a balance sheet with some assets on it you can start thinking about applying for a regular loan. For small businesses at the 'start-up' level it would be great if they had access to bank loans for their needs, since borrowing from a bank is much cheaper long run than from an angel (after all, the bank does not take equity, only interest).
Has anybody here ever gotten money from a bank based on a non-existent business?
This is the first link that comes up on Google when you search for "Small Business Loan": http://www.merchantloans.com/. The first item listed under that heading is "Start/buy a business or franchise"
"Sooner or later most small businesses need to get a small business loan, whether to get the operating capital for business startup or to finance an expansion. "
Small Business Loans are the #1 way that people start businesses in this country (no one Angel invests in a hot dog stand)
Yes, but hot dog stands are not the kind of things that we're talking about in this context. High tech, high risk start ups typically do not walk in to their bank managers office to get a few tens of thousands up to 100K loan to start their business, they're lucky enough to get an appointment in the first place.
Banks like to borrow where there is collateral, a typical tech start up will invest in people and a little bit of hardware. Typically that hardware will be worth 0 if the company should fold. A hot dog stand can at least be sold to the next guy that wants to try his luck.
Angels not investing in hot dog stands prove my point, they don't detract from it.
Banks will gain if they get more business because of this, since angels do not invest in to that kind of business the banks already have it, and the kind of investment that angels do will not be touched by banks.
Do you personally know of a high tech business that got its first capital from a bank ? Do you know of a high tech business that got its first capital from an angle or more than one angel investor ?
For me the score is exactly 0 for the first and 20+ for the second. (where I know one or more of the founders personally)
I don't buy that. Your whole argument is based around assets being worth enough to mitigate risk and they simply aren't. Taking the hot dog stand for example they're going to spend most of their money on merchandise and rent which aren't assets that can be repossessed. For those few assets that can be repossessed a bank has to go through petitioning a court to give them permission to repossess, then they have to pay someone to repossess the merchandise and then they have to pay to auction off the merchandise. That's a lot of money to spend for what amounts to some tables and a grill.
The same is true of most new businesses. Even those that create assets in their product (since the bank has to sell off something that people clearly weren't willing to buy from the original business).
As for high tech firms my whole point was that banks can't compete with Angel investors right now but if this law passes they'll have limited options which will push them towards the banks (which in turn is exactly what the banks want)
So, if I read you correctly you think that when angels no longer take the 'market' that banks will suddenly become interested in this kind of loan ? Do you see banks taking equity in start-ups ? Do you see start-ups that right now can't get money from banks but can get money from angels in this new environment suddenly getting bankloans ?
I really do not see that happening, if they could get their loans - at any condition - from banks today they would. The banks and the angels are not in competition because banks can't compete, they are not in competition because they don't want to compete.
> Small Business Loans are the #1 way that people start businesses in this country (no one Angel invests in a hot dog stand
Even if SBA loans are the number 1 way people start biz (Canada isn't the US), they're not the way people start biz that have new products or services.
No, you can't repossess the rent paid by a hot dog stand or its inventory, but a hot dog stand is fairly low risk. We know that people will buy hot dogs, so the only question is whether the applicant can manage to not screw up the cooking, can sell, can manage, and has a decent location.
Quora isn't going to get an SBA loan.
And, while I like hot dogs as much as the next guy, Quora and its ilk make a bigger difference.
There doesn't seem to be any shortage of the sort of things that the SBA funds.
Banks don't compete with angel financing, because any business capable of getting a bank loan would be crazy to take angel financing instead.
Suppose your company gets a bank loan. If the company is successful it pays back the loan with interest; if it's unsuccessful it goes broke and pays back nothing. The bank thus really hates lending money to companies with a significant chance of failure.
Suppose your company gets an angel investment instead. If the company goes broke it still pays zero, but if the company is successful then they'll have to pay a lot more than the principal back. If you can get a bank to lend you money it's stupid to sell off part of your company at damn near any valuation.
> If you can get a bank to lend you money it's stupid to sell off part of your company at damn near any valuation.
Exactly.
The only loop hole where banks are involuntary partners in funding a start-up is when a person uses their credit cards to fund their start-up. If the start-up fails (and they often do) it can put you in a world of trouble though.
Angels invest exactly in those that can not get money from banks because they are too high risk.
Once a business is established and has a balance sheet with some assets on it you can start thinking about applying for a regular loan. For small businesses at the 'start-up' level it would be great if they had access to bank loans for their needs, since borrowing from a bank is much cheaper long run than from an angel (after all, the bank does not take equity, only interest).
Has anybody here ever gotten money from a bank based on a non-existent business?