Business loans or investors? When you need to raise money for your business, you have two main approaches. You can either borrow through some type of debt or you can raise money through investors by selling them a part of your business, known as equity.
Both means of financing have their benefits and drawbacks. The type of financing you choose will have a big impact on the future of your business.
Consider these 4 points compiled by GET.com before settling on a business loan or taking on investors.
Lenders. Loans typically have a set repayment schedule. You often need to start making payments on the loan soon after you take it out. If your business is struggling to make a profit, this extra bill can be hard to handle. If you fail to make your scheduled debt payments, the lender could ultimately force your business into bankruptcy.
Investors. When you give investors equity, they aren't expecting to be paid back immediately. Instead, they're buying into your business with the idea that you will eventually earn a profit and they will receive a share of these profits. If you're worried about the immediate payments on a loan, equity can be more attractive. Since there are no required, scheduled payments to an investor, they couldn't force you into bankruptcy.
Amount Paid Back
Lenders. With borrowing money, you know exactly how much you'll pay back over time. Your loan terms should clearly outline how much you'll end up owing and once the loan is repaid you're done paying the lender.
Investors. With equity, the investor is entitled to a share of your future profits as long as they own part of your business. If you sell an investor 10% of your business, they will be owed 10% of your profits as long as they are part owners. Over time, this can add up to much more money than what you would have paid on a loan.
Lenders and investors consider different factors when deciding whether to give you money.
Lenders are more concerned about your short-term financial position because they want to know whether you'll be able to pay the money back on-time in the near future. They aren't as interested in your ideas or your long-term profit potential because they would be repaid the exact same amount of money regardless of how successful you end up.
Investors are more focused on where your company will be in the future. They want to know about how you plan to expand and how much you will earn after a few strong years. As a result, investors might be more willing to take on a risk with you if your new business isn't strong yet but has good potential.
Control Over Your Business
Lenders aren't involved with running your business. They only expect that you will eventually pay back your debt with interest.
Investors, on the other hand, become partial owners of your business. As a result, they will have a say in how you run the business, especially if they own a large amount of the company. This can be frustrating if you have a very specific way of managing things.
At the same time, an investor could help you plan and run the business, which is nice if you want a partner. A lender would not get involved so you'd be on your own to figure things out.