So, you’ve come up with a plan for a business that you think will be successful – now, yet another decision is put before you, namely: how to fund your business. You have two main options – a business loan or an investor.
Depending on your business plan’s size, you may not easily borrow money from relatives or friends. Therefore, you may have to pick between the two a business loan or finding investors. In this article, we’ll showcase the differences between having a business loan or being backed by an investor.
What is a Business Loan?
A business loan is, in short, a type of financing that you have to pay back. If you rely on this funding option, you will not have to give up equity in your company – however, if the loan you are applying for is a secured one, you may have to provide collateral.
Basically, when relying on a business loan, you let the bank/ lender put a lien on your equipment or something similar – compared to investors, case in which you have to give up the ownership of a part of your future business.
What are Investors?
An investor may come in the form of an individual or of an organization that provides funding for one’s business in exchange for company shares. Naturally, an investor’s hope is that they will get a return on the money they have invested.
As mentioned before, you won’t have to pay anything back to the investor, but a share of your company’s value – equity.
Business Loans – Advantages and Disadvantages
First of all, when it comes to a business loan, you’ll always know what you have to give back to your lender – once you repay the sum, you are no longer bound to your lender and you can freely manage your business.
Naturally, the best part is that you will retain full ownership over your business – the relationship between you and the lender is basic; you just borrow money and will have to repay them. As simple as that!
Now, when it comes to disadvantages, it is important to keep in mind that a business loan may be restrictive – in short, you may be allowed to use the funds of your business loan for certain purchases only.
Obviously, if this is your first business, it may be hard for you to acquire a loan – it is known that business startups are hard to fund via a business loan, as lenders may not want to fund you.
Investors – Advantages and Disadvantages
When you reach out to an investor and start working with them, there is always the possibility that you receive additional funding – if the investor thinks that your business will have success, they take a risk and provide you with additional funding.
Naturally, this is because they want to get a return of their investment. Moreover, an investor may also provide you with guidance – unlike a lender, your investor will most likely build up a business relationship with you and try to help you grow your business.
On the other hand, when it comes to disadvantages, the same business relationship we talked about may prove to be a nuisance – a certain subjective thing may create a division between you and your investor.
In this respect, keep in mind that, if the investor does not agree with your choices, they can pull out whenever they want.
Moreover, it may also be quite hard for you to regain full ownership of the business or even sell it in the future – for example, if you want to sell your business, you can only do so when the investor can get a payout based on their specific percentage of equity.
The Bottom Line
In short, it is quite hard to decide which of the two is actually worth your time. Naturally, it all depends on your decisions and plans for the future – you have to decide whether you want an individual to own a part of your company or dealing with the repayment of your business loan.
By Samantha Acuna
Samantha Acuna is a writer based in San Francisco, CA. Her work has been featured in The Huffington Post, Entrepreneur.com, and Yahoo Small Business.