If you are planning on starting a new business, your major concern would be about the way in which you can raise money. In such circumstance, you must first determine whether you would want to opt for business loans or obtain money from equity investors by selling your business’s ownership interests. To make a wise decision, you should know about the advantages and disadvantages of choosing between the two.
Borrowing money for funding your business carries with it several advantages. Most of the time, you would opt to borrow from your family members or friends, but in some cases you may be lucky enough to obtain a loan from a commercial lender as well.
The main benefit of obtaining a business loan is that, even though the lender will impose a rate of interest for the amount of money you borrow, he or she will not have any rights to involve in your business or direct you in running or managing your business. Most importantly, the lender will not hold any right in any of the profits obtained from your business, and all you need to do is make monthly debt payments and repay the personal loans for bad credit on time. Also, you will be able to reduce the interest payments as business expenditure.
If you decide to borrow money from a family member or friend to fund for the startup of your business, the rate of interest you will have to pay would be typically lesser than when you obtain a loan from a commercial lender, such as a bank, financial institution or credit union. With this type of borrowing, you can also eliminate the loan fees charged by commercial lenders. In addition, you will also be able to negotiate even more flexible interest rates and repayment plans than usually allowed by a commercial lender.
If you have any of your family members, friends, or others wishing to invest in your business rather than just lending you money, it would also be an excellent way to raise money to fund your business.
Obtaining money by way of equity investors enables you to use the cash received to fund for the startup expenses of your business instead of large loan payments. Also, if your business goes bankrupt or loses money, you will not have to pay back the initial investment of the investor, unlike with business loans. However, your investors must be aware and should accept the fact that getting their investment back is not a guaranteed aspect. In addition, most equity investors will have immense business experience, and can provide you valuable assistance, advice and moral support.
Which to Choose?
If you are looking to obtain funding for a startup business venture, seeking the help of equity investors is probably the better choice, because you will have to repay the investment made by them only when your business makes a profit.
On the other hand, for ongoing businesses, business loans are the best choice, especially for businesses that have a constant cash flow.