Knowing the differences between taking out a loan and bringing in an equity investor are essential to choosing which is right for you.
Small businesses seeking capital basically have two options—finding business loans or securing equity investments. Determining which is better for your business will depend upon the type of business you own, your credit worthiness, and your willingness to have someone looking over your proverbial shoulder.
Advantages of Business Loans
Disadvantages of Business Loans
Advantages of Equity Investments
Disadvantages of Equity Investments
Venture Capitalists and Angel Investors
Many people hear the term venture capitalists and assume that these investors will be interested in becoming equity investors in their business. However, venture capitalists are like any large investor and are seeking a large return on their investment. Therefore, venture capitalists are uninterested in most small businesses, which generally seek to turn enough of a profit to make a comfortable living for the owner and employees. Unless your business projects huge potential profits (for example, you have a restaurant that you think has potential to be franchised or you have an invention you're working on and need capital for research and development), forget venture capitalists.
What you may be seeking is an "angel" investor. Angel investors (the name comes from an old term describing investors in Broadway productions) also seek a return on their investment, but their goal in investing is sometimes more altruistic. Often, they're wealthy entrepreneurs who want to share their knowledge and help businesses get off the ground.
Information on angel investors isn't as detailed as surveys of venture capitalists or traditional lenders, and it's often difficult to tell the difference between a regular business investor and an angel investor (an angel investor could also be a family member or friend), but according to the Small Business Administration, they are out there, and they are investing in the success of many small businesses.
Choosing Between Business Loans and Equity Investments
Ultimately you will have to determine how the advantages and disadvantages of a business loan and equity investment apply to you and your business. If your business plan projects potentially large growth, equity investors may be attractive for their lenient repayment terms, low risk (they won't sue you unless you defraud them), and business acumen.
On the other hand, if you project modest growth (i.e., you aren't planning on running a large business enterprise) or want complete autonomy in making business decisions, a loan might be better for you.
Whichever option you choose, be sure to carefully contemplate the pros and cons of a loan or equity investment, and you will be able to make a well thought through decision.
Let an Attorney Help You With Your Business Financing Decisions
Not sure what the next step should be for your business? If you are considering an equity investment or a loan, you should learn all you can about the law and the obligations that come with these courses of action -- as making the wrong decision for your business can hurt your chances for success. You can learn more about your situation by meeting with a small business attorney in your area today.