If you’re looking for the money to grow your business, you have a few options. Beyond your assets, family, and community, there are two major players that provide funding for growing businesses at a cost: business lenders and investors.
In this quick guide, we will go over the pros and cons of business loans and investors.
Definitions: Business Loans & Investment Capital
A business loan is a sum of money or rotating credit borrowed from a lender for business purposes. A bank, credit union, or other lender provides business funding, and you repay that funding plus fees and interest. Before borrowing, you agree to the rates and the repayment term.
Investors investigate businesses for their prospects for future growth. When they see an opportunity, they buy equity in the business and may provide other forms of funding. That investment capital is used to sustain and then grow the company. There are no repayment requirements, and investors are compensated in dividends or capital gains if the business is sold.
What Business Loans Can Offer
Business loans offer relatively fast and hassle-free access to funding. Compared with seeking investment capital, the process is relatively simple. For example, business loans of €1,000 to €5,000,000 are available in Estonia or Lithuania, and applications normally take less than half an hour.
Business owners take these loans to finance purchases or working capital. These financing products might be needed to build credit, expand the business, or cover seasonal revenue fluctuations, among other uses.
While business loans do come with interest charges and fees, they are often tax-deductible.
Disadvantages of Business Loans
The main disadvantage of a business loan is a debt obligation that carries potential negative consequences. With the exception of declaring bankruptcy, borrowers are obliged to pay back the loan principal plus interest regardless of its financial circumstances.
In most cases, business loans carry collateral requirements. In these cases, the risk can be controlled, but borrowers still stand to lose a lot if they cannot repay.
Apart from these disadvantages, irresponsible use of business loans or unfortunate circumstances can strain your cash flow.
What Investment Capital Can Offer
Investors buy equity in your business if they think it will succeed. If your business does succeed, they are compensated in returns in the form of dividends. They are then compensated with capital gains should you sell while they still hold equity.
It’s also important to remember that investors often bring more than just funding. They also normally bring their experience to the table.
Naturally, investors want a return on their investment. Like business lenders, investors have a vested interest in your success. But investors are far more likely to provide extensive support in the form of:
- Building a long-term relationship.
- Providing lessons based on their previous experiences.
- Helping guide you through important decisions.
In some ways, investors represent less risk. For example, if the business fails, you are not obliged to repay investors. With a business loan, you are obliged to repay the lender regardless of your business’s financial situation.
Investment capital essentially comes with a more intimate arrangement between you and investors. This can lead to far more support that can benefit you greatly when experienced capitalists bring their funds and wisdom into the picture.
Disadvantages of Business Investors
On the flip side, some business owners end up feeling annoyed and overburdened by investors. The benefits of the business-investor relationship can also become a drawback. You have less coldness and thus less breathing room than you would with a business lender. A disagreement with a major investor can lead to a headache.
Remember that, unlike a lender, an investor is free to back off at any time. A serious disagreement can lead to a more serious problem. Also, it can be difficult for you to regain full ownership of your business or even sell it. First, your investors would need to be paid out for their equity in the business.
Where to Find Business Loans
You can talk to your local bank about business loans. If you need other options, there are other lenders that can service business loans of all kinds in most locations. For example, businesses in Norway can borrow up to 50,000,000 KR online. Similar sums are available in Scandinavia, including Denmark and Sweden. Unsecured loans are also widely available online if you are unable or don’t want to provide collateral.
Where to Find Investment Capital
Investment capital is a bit harder to find and normally more cumbersome to secure.
There are many different types of investors. Some individuals called “angel investors” provide investment and mentorship to businesses they see a bright future in. Likewise, venture capital firms take ownership stakes in businesses, but with the entire institution becoming invested.
There are other potential ways business owners can find investment capital, including:
- Crowdfunding platforms.
- Corporate partnerships.
- Business incubation programs.
- Government organizations.
