If you have decided that you cannot open your startup business or grow your existing business without financing, you need to look for a different option. Bank loans or loans from an alternative lender are options that come to mind first. However, an increasing number of business owners are opting for private funds from accredited investors.
Before you start pursuing a loan, search for a private investor and see if it is right for your company. There are many factors that affect risk and return that a careful evaluation is mandatory for you to make an informed decision.
We are going to break the pros and cons down of both financing options and how they might affect your business’s long-term goals.
The Pros and Cons of Private Investors
Pros of Private Investors
- Easy application process: finding investors for a small business is beneficial because they don’t require the same type of financial health that a bank would.
- Collateral is not required: private investors do not require collateral and will give you money if they believe in you and your business idea.
- Affordable funding option: In the short-term, raising money through private investors may be far more affordable than taking out a loan. The deal with your investor can be structured so that the investor only starts getting a share of your profits once you’re profitable.
- Less risk of legal issues: Perhaps most importantly, private investors generally can’t take you to court as easily as a bank can for not paying them back.
Cons of Private Investors
- Hard to negotiate terms: private investors don’t require collateral or verifiable financial history, so it will be hard to negotiate.
- Loss of business control: Investors can ask for a large equity share in your business. In this way, you give up control over your business decisions, which can lead to problems in the future.
- Legal contracts are time consuming: you’ll need a lawyer to help you draw up documents and advice you on raising money, if it is raised incorrectly, you’ll face legal repercussions.
The Pros and Cons of Business Loans
Pros of Business Loan
- Move control over your business: since they’re standardized, small business loans aren’t nearly as varied as private investments. However, with a small business loan, if you make your payments on-time, that won’t be the case.
- You keep the profits of your business investment: With a business loan, you don’t give up any of the upside in your small business. If you use a $500,000 term loan and turn it into $1.5M in profit, that profit is all yours.
- Application process is straightforward: obtaining a business loan is more straightforward in terms of paperwork and liability issues.
The Cons of Business Loans
- Can be challenging to obtain large loan amounts: particularly for early-stage small business owners, large business loans are difficult to obtain. The ones that are available to you in the early stages of your business usually have less favorable terms, like higher interest rates or smaller amounts.
- Might require collateral: loans also tend to carry more downside risk than private investment. With a business loan, you could have to put up collateral, which the bank can take if you fail to pay.
The Bottom Line
No matter what route you take, you’re paying in the long run for short-term cash so the decision boils down to how you want to make that payment. When you break each option down and weigh them based on your small business’s needs, you’ll find the right for you.