Business Loans vs. Investors: Which Is Worth It?

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 choose between a business loan and finding investors. In this article, we’ll showcase the differences between having a business loan and 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 won’t have to give up equity in your company. However, if the loan you’re 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. Compare that to using investors, in which case you have to give up ownership of a part of your future business.

What are investors?

An investor may be an individual or an organization that provides funding for one’s business in exchange for company shares. Naturally, investors hope to get a return on their investment.

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’s 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’s well known that business startups are hard to fund via a business loan, as lenders may not want to take a risk on you.

Investors: Advantages and Disadvantages

When you reach out to an investor and start working with them, you may receive additional funding. If the investor thinks that your business will succeed, they may take a risk and provide you with additional funding.

Naturally, this is because they want to get a return on 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 disagreement 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 difficult 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 can be difficult 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 deal with the repayment of your business loan.

Samantha Acuna is a writer based in San Francisco, California. Her work has been featured in The Huffington Post, Entrepreneur.com, and Yahoo Small Business.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.