If you are starting a business or have been doing it for years, a question that you most probably have asked yourself is “should I get a business loan or look at’ investment?”
The answer depends on several factors and such decisions can influence the future development of your business.
This is a decision that should not be taken lightly, and weighing the two up against each other will benefit you in the long run.
What are the benefits of a business loan and an investment?
| Business Loan | Investment |
| Maintain Ownership. The beauty is that no one gets a part of your business. You borrow money from a lender, pay them back, and part ways afterwards while still having the original ownership. | You don’t have to repay money even if the business fails. Investors understand the risk associated with investing in companies that might not be able to obtain a business loan. If it is not specifically stated in the contract, you do not have to repay the investor if your business fails. You just have to make sure that your startup is attractive to them. |
| Perfect for the short-term. If your business is in the need of immediate short-term financing then a business loan is the way to go. Even a loan for three to five years is better because investors are in it for the long term. Business loans in the short term allow for immediate financial gain and ownership retention. | Guidance. Something that a business loan cannot provide you is the investor’s experience, knowledge, and connections. With the guidance of an industry specialist, your business can grow much faster. |
| Predictable Cash Flow. Business loans are safer than an investment. Lenders cannot back out of a loan, but investors can suddenly decide that they are no longer interested. Yes, lenders do require monthly payments, but it is a condition that you evaluate and agree with at the start. | Long-term Relationship. If initially, the investor has been satisfied with the growth of the company and returns on investment, then there is always a possibility to get an additional investment in the future as trust has already been created. Just make sure to ask them these five questions before sealing the deal. |
| Creative and Flexible. Business loans have set deadlines for repayments, however, investors can be flexible in changing their expectations. Also, the proposed investment tends to be creative, for example, in allowing the owner to buy back part of the equity if certain goals are met. |
What are the drawbacks of a business loan and an investment?
| Business Loan | Investment |
| Difficult to Obtain. As a startup with only an idea to show, acquiring a business loan is close to impossible. | Reduced Ownership. To gain the necessary funding and expertise of the investor, you sometimes are forced to give up the majority owner of the business. |
| Personal Assets at Risk. To protect themselves against risk, banks require collateral in the form of business or personal assets. | Share of Profits. While you don’t have to worry about interest payments on the loan, you have to worry about sharing the profits. At the start when your revenue is considerably small this is not such an issue, but when your business thrives, business loans start to seem more appealing. |
| Monthly Payments. Whether it’s a good or bad month for your business, your payments are still due and there is no negotiating around that. | Relationship-Decision Making. When business decisions need to be aligned with several people, personal differences can create a divide when it comes to business decisions. |
Lenders offer a variety of different kinds of loans to meet the needs of the business. Over a short period, business loans are more beneficial than an investment. You can get working capital to meet seasonal demands or purchase the necessary equipment. A well-thought-out plan and accurate cash flow projections can allow your business to grow without giving up any ownership.
On the other hand, investors can be of great benefit in new industries with great market potential and competition. The right people and partners can allow your business to acquire the most market share and ultimately establish a solid position as the market leader. By being ready to pitch your business, you can win them over so much faster.
It is important to understand that there is no right or wrong. It entirely depends on the path you take based on your needs and wants. Either you need to satisfy short-term needs or you are looking for long-term expertise, both options can help your business to grow. Whichever option you choose, you will still have to manage your finances in a smart and effective way.
