Should I Have Investors or Get Business Loans? Learn About the Pros and Cons of Each
Should I Have Investors or Get Business Loans? Learn About the Pros and Cons of Each
Many healthy businesses, at some point, will require additional business financing. Old companies might require extra funds to finance growth and working capital, while start-ups would have to deal with starting costs. If you have determined that you cannot start or take your business to the next level without additional financing, it's time to weigh your options of getting said financing.
Taking on some debt is quite common when people think about financing their business, and loans are among the first option that springs to mind. However, an increasing number of business owners are opting for the option of getting investors instead.
The choice for a financing option is dependent on the kind of business you are running (or planning to run for new businesses). You have to consider important factors, such as your business position, age, market opportunities, performance, number of employees, etc.
You should first decide which options would best suit your type of business, examine the pros and cons of both options, and generally be well informed about your decision. This saves you from wasting time looking at the wrong type of financing.
In this article, we will break it all down and discuss the pros and cons of both options to help you understand what you would be getting yourself into and how they will affect your business going forward.
Several factors go into play when making this decision, and both choices have the potential to change the course of your business forever. Do not make the decision lightly. Read further to discover which might be more suitable for your business.
Topics Covered in this Article:
- Understanding the general realities of getting funded
- How do business loans differ from investors?
- Pros and Cons of Business Loans
- Pros and Cons of Private Investors
- Conclusion: Should I get Investors Or Business Loans
Understand the General Realities of Getting Funded
Like everything in business, a lot about obtaining financing for your business depends on your particular business detail. Many factors are considered, such as resources available, the growth stage, and other factors.
Are you an ongoing business or a start-up? The opportunity for obtaining funding depends a great deal on the specifics of your business.
For example, traditional banks have a variety of standard business loans available to ongoing businesses but not to start-ups. Also, high-growth start-ups have access to business funding that would not be available to established stable businesses.
How Do Business Loans Differ From Investors?
There are a lot of differences between investors and business loans. Before we consider the pros and cons of both financing options, we'll take a few minutes to define them.
An investor is an organization or a person that provides funding for your company in exchange for a share in the business, hoping that they will get a return on their capital. There exist several types of investors. However, no matter which you decide to go for, the basic remains the same; you are indefinitely giving up a part of your company's value (equity) in exchange for funding.
On the other hand, a business loan gives you the financing that you will be required to pay back. You are not required to give up a share of your company. To qualify for a loan, you are typically required to provide collateral. However, having a bank/lender put a lien on your equipment differs significantly from giving up ownership of a percent of your company.
Pros of a Business Loan
You Maintain Sole Ownership of Your Company
The great thing about getting a business loan is that nobody gets a part of your company. You borrow funds from the lender, pay back these funds, and then part ways with the lender. You still retain 100% ownership of your business.
You Maintain Sole Decision-making Rights for Your Business
You can do whatever you want with your business when you own and operate 100% of it. Want to start selling a new line, change your menu, or put forward a new product? Great! You can do it. A business loan enables you to make these business decisions, no matter how unorthodox, without being accountable to anyone else.
You Retain All the Profits You Make
With a business loan, you get to keep every single penny of the profits you earn.
You Build Credit
Getting a business loan simultaneously builds your credit and makes you qualified for better loans in the future. Did you qualify for only a small amount on your first loan with high interest? Once the current loan term is finished (with you making timely payments), your credit will have increased, increasing your chances of getting a bigger loan with lower rates next time.
Shorter-term Compared to an Investor
A business loan is recommended when you have an immediate need that will be solved in a short amount of time. Even if your loan term is 2-5 years, you own your company free and clear once this timeline is up. On the other hand, investors are in it for the long haul and likely will be around as long as you remain in business. If you only need short term assistance, giving up a part of your business isn't worth it.
You are safer with going with a business loan if you want predictable finances. This is because if you take out a loan for a particular amount, you can count on having the money to help run your company. A lender cannot just opt to back out of a loan. An investor can decide to withdraw their financing one day because they are no longer interested in your business.
Cons of a Business Loans
You Are Charged Interest
Being charged interest is an unavoidable evil if you want to acquire funding for your company through loans.
Monthly Payments Are Required
Your payment WILL be due on the due date, rain or shine! There is no negotiating around that. The lender doesn't care if you've had a tough month or if you've run into some issues with your business, all they want is your payment, and they'll do whatever they can to ensure they get it.
You May Have to Put up Collateral
If you are a start-up or new in business, you would most likely not have built enough credit to secure a loan based solely on merit and credit. In such a situation, lenders will require you to put up collateral worth your total loan value. If your company does not have much collateral, you might have to put up some of your personal assets such as a car or your house.
You Risk Losing Your Business and Personal Assets
When you take out a business loan, you are accountable for that amount, which wouldn't change. If you don't pay, there is a very possible that the bank will not only liquidate your business but come after your personal assets as well in a bid to cover your debts.
Pros of Having Private Investors
You Usually Don't Have to Repay the Money – Even If the Business Fails
An investor can be a great idea if you are starting your business and require funding for your business but do not have enough business credit to secure a loan. They'll provide you with the needed funds, and you would not be required to repay it! Investors understand that there are risks connected with investing in new business. So, you will not be held responsible for any repayment if your business fails unless stated explicitly in your contract with the investor.
No Interest or Monthly Payments
You do not have to worry about interest or monthly payments when an investor gives you money for your company. Not having to fret about your business making enough to enable you to pay for the month is a great relief and a major attraction.
The Advice of Investors May Help Your Business
Investors' advice and mentoring can be a priceless resource, especially if you are new to running a business. Typically, investors have "been there and done that"; they know all the tips, tricks and pitfalls to avoid. It's worth considering this option if you desire some amounts of help along the way.
Cons of Having Private Investors
You Have to Give up a Share of Your Business
Investors provide funding for businesses because they envision getting greater returns on their initial investment in the long run. They do not give businesses money out of the goodness of their heart. They invest in a company because they believe that the business would be successful, and they are placing their bet on that conviction of that belief.
Investors Now Have a Say in How You Run Your Business
You likely would not be able to execute your plans exactly the way you want to do it. This is because investors now have money invested in your business; their goal is to ensure the business succeeds. This might sometimes mean that they'll dictate how you should run your business based on their personal experience.
While having someone giving business advice seems great, it can quickly become frustrating and cumbersome, especially if being your own boss was a major factor as to why you started your business.
Too Many Investors and You May End up Getting Kicked Out of Your Own Business
If you yield too much equity in your business, you will cease being the primary shareholder. This means that all the other shareholders, when combined, hold a majority of your company. You could be very quickly voted out of your own business by your 'investors' if you get to this point.
Share of Profits
While you do not have to fret about paying interest, you do have to be okay with the idea of sharing your profits. This might not seem like a big deal if your business is a start-up or isn't making much yet. However, once your business starts to take off, and you begin giving out significant sums to your investors, you might find the interest rates of a loan very appealing.
Conclusion: Should You Get Investors or Get a Business Loan
The decision for which funding source would be best for you boils down to you and your particular business model.
Whatever route you take, you are merely paying for short-term cash. The choice boils down to the best way for your business to make that payment. When you get funded through investors, your 'payment' is a smaller share in your company's growth and less control of your business. When you take a loan, your payment comes in the form of the risk of default and interest.
The decision on selecting a funding source is unique for every business because of several factors whose value changes depending on your business's circumstances.
Perhaps you detest taking instructions from others concerning running your business, or giving up a share of your business is not something you can endure, or maybe you consider your risk of defaulting on a loan as extremely low.
Whatever the case might be, the "cost" of both funding sources (investors and loans), the important thing to recognize is that there is no wrong answer, none of the decisions are "bad." The direction you choose is entirely up to you and your immediate needs.
Just because a decision is a complicated one doesn't mean it must be difficult. What's important is that you are comfortable with your business and have acquired the funding you require to grow it! To decide which options best suit your business, consider the pros and cons listed above, break each option down, and carefully weigh them based on your particular business demands; you will find the best path for you.
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