3 Reasons Why A Business Loan Is Good For Your Start-Up
If you are only getting started in business, financing could be your biggest dilemma. Even if you have the best business idea that you are certain will turn into cash, without capital it can be impossible to get it started. Of course, you have probably read somewhere that something like 90% start-ups fail, but don’t let that deter you. Most times a business will fail from lack of capital so get a handle on that and be a member of the 10% that succeed club.
Equity or Debt?
The dilemma for new business owners is whether to seek a loan or start with their own savings. The tricky thing about choosing equity is that it might not be an option. You probably have some money set aside, but is it your child’s college fund? If it is, do you want to gamble with those funds? The only other options left are to pursue small business loans, or bring in a venture capitalist. The following are our thoughts on what the better option for your business might be:
- Diluted Ownership
If you let an investor in on your plan, they will certainly demand a percentage of the investment. You might have few options on the amount of control you keep, but you will have to make it worth their while since you really need their investment. In the end, it is possible to conclude that your business will not be your own.
While you may benefit from the experience of the investor, especially if they have been in your line of business before, you will not be making all the decisions for your business. This may cause you to stray from what you originally envisioned for your company. This may be a problem for you or you may think nothing of it. Only you can decide what is right for you.
With an investor relationship, it is possible it will be based solely on the bottom line. If they happen to lose interest in your business, or find it’s not growing fast enough, they might decide to get out of it to find a more challenging and profitable venture. They might even sell their interest to another party and now you can find yourself in business with someone else.
With small business loans things are quite different. You do not take on an investor not do you give up your profits. The relationship is solely based on you repaying what you owe them. As long as you fulfill your monthly obligations, all will be well. You retain full ownership and decision-making responsibility for your business.
- The Risks
With an equity investor who is interested in growth (of course, they are) you are likely to make expansion plans sooner than you had imagined. This is not a bad idea. The only concern arises when they want to get out of the investment.
As the business grows, the cash requirements become bigger, and you may be unable to pick up from where they left if they decide to. You will be at their mercy to keep the newly expanded business, and they may take advantage by seeking a significant share in what was originally yours. Even though the business is growing, you end up losing control to your investment partner.
So What Do You Do?
While equity investors provide you with the capital you need without demanding it back, they also become part of your business. On the other hand, small business loans only require you to make scheduled payments. You retail control of your business with all the decision making and so on. Our advice to you is this: If your company is generating stable cash flow and can pay a business loan, a business loan is most likely the type of financing you will want to look into. However, if you have an idea, not much capital and do not mind taking on an equity partner (and possibly giving up some control), you may want to take on an investing partner. Only you know what your business concept is and what the right type of situation that will work for you will be. We hope knowing a bit of the differences will help you get started – no matter what way you decide to go.