Business angel finance is moving into the mainstream, as the success of the BBC2 show Dragons Den indicates. While many still think of angel investment as a modern phenomenon, it is in fact a well-established form of finance for young and growing businesses. In the UK alone around 1bn a year of such investments are officially declared and the reality is greatly removed from the snap decision-making that we see on television.

Business angels are wealthy individuals who invest in companies in return for an equity stake. The investment can involve both time and money, depending on the investor. A business angel will typically want to invest less than a venture capitalist, say 10,000 to 250,000.

Getting tax relief
Unlike banks, business angels do not require security, which makes them particularly valuable to those businesses with little or no security to offer. There are also some attractive tax reliefs for investors who provide capital for unquoted businesses, primarily under the Enterprise Investment Scheme where the buyer of the shares gets tax relief at the lower rate of income tax, and when he sells the shares, it is possible to defer the capital gains tax on what those shares might accrue.

Unlike the fearsome "dragons" that you might recognise from TV, business angels are usually far more benevolent and helpful, and can have a much more positive role to play in the development of a business than simply acting as ruthless investors preying on companies looking for capital.

Typically, business angels have made their money through other business ventures and, because of that business background, they understand the ups and downs of running a company and can therefore bring valuable experience to the businesses in which they invest. While for some owners, the idea of an "activist" shareholder may be unattractive, many find that an angel investor can act as a great mentor for the management team.

There are a number of ways to find an angel. Some are informal you might know a family member or friend who wants to be involved. Alternatively, professional advisers such as corporate financiers, accountants and lawyers might be able to put you in touch with someone. Angel networking organisations also exist and are a good source of contacts.

While the TV dragons make snap decisions, in reality most angels do not part with their cash quite so quickly. Unlike venture capitalists, whose business it is to invest in privately held companies, business angels do not have to invest their cash. This means they are selective about the companies they fund. Over 90% of businesses applying for angel funding are rejected in the initial stages, so while it is not inconceivable that you could find an angel who will sign a cheque over dinner, the majority will want to conduct thorough due diligence before entering into any agreement. Business angels tend to invest in local companies, generally within a radius of 100 miles from their home. They also tend to favour sector-specific investments, relying on their expertise in a particular industry to minimise risk when choosing investments. Often they will have useful contacts in a sector, that they will look to leverage. So in the printing industry you might find an angel who has print experience and can see an opportunity to invest in a company to help it grow, perhaps by investing in new technology or by selling new products and services to its existing customer base. Growth is fundamental. You may not be able to tempt a business angel unless you can show growth potential of at least 20%.

It is estimated that as much as 40% of all angel investments are lost and only the top 20% achieve more than a 50% return, so an investor will only be tempted if there is the opportunity for a big pay-back.

Looking for business angel finance can be a long process, but if you can identify an appropriate investor and the chemistry is right, it can be an excellent way of securing funding for those businesses that find themselves in the equity gap.

30-second briefing on... Attracting a business angel
- Business angels invest in unquoted businesses, generally in sectors that they understand well
- There are attractive tax reliefs available for business angels
- The angel knows nothing about your business, so avoid jargon and present your case in clear and understandable language
- Back up any figures with facts and knowledge
- Explain why you are focused on a particular market niche and identify growth and diversification possibilities
- Explain how you will use any money raised "Ill be paying myself" is not an answer
- Mention any large orders and any trading track record and bring in references where possible
- Make sure the angel is someone you think you could work with, otherwise you should walk away
- Different angels have different areas of expertise. Just because you're dismissed by one potential backer doesnt necessarily mean youve got an unworkable idea. Be persistent
- You should be evaluating the angel in the same way they are evaluating you and if you feel theyre asking too much, or they dont understand your business, youre free to abandon the deal

Peter Petyt is Head of Corporate Finance at top 20 national accountancy group UHY Hacker Young and specialises in advising printing companies. Contact him on 020 7216 4657 or p.petyt@uhy-uk.com. www.uhy-uk.com