Funding your business with loans vs. equity capital

The dream of every business owner is probably to have enough money to support the business ups and downs and not have to look into using anyone else's money right? But let's be realistic, every entrepreneur at some point will probably have to rely on "other people's money." The article is to help you look at the pros and cons of both funding your business with loans, funding it with equity capital.

Business Loans
If you do decide that a business loan is the way for you to go, make sure you have done your research. Ask yourself some important questions as you search for the best place to provide you with your loan. Do they meet my needs? Will they help me achieve my goals? These are important things when determining who will help you begin your business.

PROS



• Business loans have lower interest rates. In comparison with various other business funding options, these loans usually offer the lowest rates out there. The repayment terms on the other hand may vary, so be sure to do your homework and look at several different options.
•  Loan options. Yes you have loan options! When working with a lender, you have access to small business loans, non-commercial loans, as well as a standard business loan. Be sure and bring this up with your lender so you have every option on the table.
•  You control what you spend. A commercial lender will usually go over your business plans with you; helping you spend your money wisely. They act more as a guide, not someone who will control where and what you will spend the money on.
•  The lender doesn't get a penny. As a lender, they are not authorized to receive any of your profits. Their intent should be to give you the best possible advice in hope that you will return to them for other business opportunities, so listen to what they have to say.
•  Tax deductions. Most commercial loans sanction a tax deduction. This due to the interest payments that you will be making on your business loan.

CONS


• Qualifying. Sometimes the process for qualifying for a business loan can be difficult. There are some rigid guidelines put into place to ensure the likelihood of repayment.
•  Lengthy application process. Commercial lenders usually demand more information from you and will sometimes go through a lengthy review process.
•  Limitations. Most business loans are granted to those individuals that have a history of success, or in other words have been in business for some time and have a proven record of making and repaying money.
•  Collateral requirement. A standard business loan demands that you have some sort of collateral, so if you don't then look into some other funding options.

Let's now look at funding your business with equity capital. A fancy word meaning that you will find your own source of funding. Equity capital is money that will be invested into your company in exchange for some sort of ownership in the business or company. The money that is used to fund the business is not designed for repayment; at least not on a definite schedule. It is also not secured. Conversely, the investor expects that their owned percentage they have in your company will (in a certain period of time) be worth more than what they have initially invested.

Why would you want to use equity capital? Sometimes for small start up companies, commercial business loans are just not an option. Private equity loans with large growth estimates and potential might be the only option. Private equity investors may be more willing to invest in a business with a strong business plan, impressive team members, and say a few key clients, if the business is willing in exchange to grant them some percentage (usually between 25%-55%) of ownership. It may be hard to give up part of your hard work, but if this is your only option don't close any doors.

The following are some different ways of finding equity capital.

1. Venture Capital- This is money and resources that are mad available to small start up businesses usually from a group of wealthy investors. These investors are sometimes called "angel investors" because they will take provide not only the needed money, but also their expertise on how to help it grow.
2. Venture Capital Firms- These are people who invest in high growth companies with the capabilities of reaching at least $25 million in a short period of time. Their costs are expensive and require a large amount of equity. Their funds range from $500,000 to $10 million. These are extremely hard to acquire because they are so picky with who they will invest in.

Equity investors can be both passive and aggressive. They may be willing to give you the money, but play little or absolutely no part in running the business. On the other hand, you may have an investor that wants to be heavily involved in all business operations. This is where you may run into personality conflicts. Consider your investor carefully before you jump into anything.

Now that you know a little about funding with a business loan vs. equity capital decide what will work best with your business. Do you want to do most of the work on your own and go with a business loan, which may be more difficult to attain, or are you willing to give up a little of your company and your own ideas and use equity capital. Weigh your options carefully and do what makes sense to you.

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