Loans vs. Investments: Which is Better for Funding Your Small Business?

Loans vs. Investments: Which is Better for Funding Your Small Business?
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Let’s face it, when you’re starting out a business, unless you are independently wealthy or manage to obtain a government grant to start your business, you are going to have to find a way to raise funds. You’ll need money to rent a space, to pay employees, and to acquire the necessary supplies. There are two ways to do this: take out a business loan or look for business investors.

Which is better? A big part of this depends upon your business, your goals, and your personal credit history. In order to help you decide what is best for you and your business, let’s first look at the advantages and disadvantages of each option.

Advantages of a Business Loan:

  1. You will retain all rights and ownership of your business and of your business equipment

  2. You will not have to split your profits with anyone

  3. Managing money will be easier - with a loan, you have a fixed payment over time

  4. There will be more motivation to make your business work (imagine having to pay back $20,000 when there are no customers or clients lined up.

  5. You can use the money as you like for your business

Disadvantages of a Business Loan:

  1. You may not be able to pay it back on time if your business does not perform
  2. You have to pay interest on the amount borrowed
  3. You may have some asset set against the loan as collateral
  4. It may be difficult to obtain a business loan if you have a poor or nonexistent credit history
  5. Even with on-time payments, if your business fails, you may still have payments that you will be responsible for.

Advantages of Looking for a Business Investor:

  1. If you need a large amount of money, business investors can sometimes provide more than a loan can
  2. You will have others interested in the success of your business
  3. If you are new at running a business, there is a good mentoring opportunity available
  4. It may be easier to get money through other sources for your business

Disadvantages of Looking for a Business Investor:

  1. Investors can create a very complex process when it comes to running your business’s finances
  2. Business investors will often be unwilling to work with small businesses
  3. Investors will want to be part of a board of directors
  4. You may find that your control over your business is threatened should the investors not agree with your business practices.

What option is best for you?

In the article, “The Basics of Venture Capital for Small Businesses” by Rosemary Peavler, it is stated that investors look for companies that promise a high return on the investment. Because of this, they aren’t as interested in small businesses that intend to stay small. If you are planning on starting a business that you will eventually turn into a large business, or a corporation, perhaps looking for investors is a good choice for you. Examples of businesses that may want to look for investors are computer software development, product development, a store you plan to one day franchise, etc.

If, on the other hand, you plan to have a small business that will not grow, or if you do not want outside interference on the decisions you make for your company, a business loan is a better choice. Yes, you will have to pay the loan back (with interest), but you will have complete control over what your business does. Examples of businesses that will work better with a small loan include house painting, plumbers, maintenance shops, etc.

Whether you decide to look for investors or take out loans is a personal choice that should be carefully thought out. Take a look again at the advantages and disadvantages of each option. Write down a few venues where you could fulfill that option. With a little background research, you can decide what is right for your business.