By Julius Choudhury
Businesses that need to raise funds in a hurry often have two options –
borrow money from a lender or raise capital from investors. Both options
have their benefits and drawbacks. By understanding the pros and cons of
each, you can work out which is the best option for your business. Below are
the two options weighed up.
Borrowing money
Many people find borrowing money to be a lot more straightforward than
seeking investment. Nowadays, you can borrow money with the click of a
button or the swipe of a card. You don’t even need to have a good credit
score.
Of course, when it comes to borrowing large amounts, the application process
can be a little more complicated – you may need to present a business plan
to someone in person. If you want access to low interest rates, a good
credit score can also help.
Once you take out a loan, you have to pay back the full amount regardless of
whether your business succeeds or not. There are means of wiping debt, but
often have to be on the verge of bankruptcy to consider these options. The
flipside is that once your loan is paid off with interest, it’s gone
forever, resulting in one less outgoing cost.
You should always shop around before borrowing money to find the best
interest rates and repayment schedule. This guide
at Forbes
offers tips on finding the best business loan.
Some different ways of borrowing money include:
- Bank loans: These loans tend to come with lower interest rates, but higher eligibility requirements.
- Private lenders: These loans tend to come with lower eligibility requirements, but higher interest rates.
- Lines of credit: These allow you to borrow money continuously up to a certain limit. Credit cards are reliant on a line of credit.
- Peer-to-peer lending: This involves borrowing money from individual lenders.
Seeking investment
Seeking out investment involves offering shares in future profits in
exchange for funding. It can be a little more complicated than applying to a
loan – because investors are only certain to make a return if your business
succeeds, you must prove to these investors that you are a successful
business. This could mean having to present a detailed
business plan
and make a pitch in some cases.
Unlike a loan in which you owe a specific amount of money, the amount of
money you owe to investors is completely dependent on how successful your
business is. For many people, this can make it preferential to a loan. The
one drawback is that you may pay investors more in the long run than you
would pay a lender.
Some investors and advisors may be able to offer expertise as well as
helping you to achieve funding. When seeking investment and advice, it’s
worth always looking up credentials of individuals and organizations such as
these credentials of Adam Blumenthal
on Business News. It could also be worth researching into past clients that they’ve worked
with to get an idea of the businesses they invest in.
A few different ways of seeking investment include:
- Angel investors: This generally involves seeking investment from a wealthy individual.
- Venture capitalists: These are organizations that tend to invest money into new rapidly growing businesses.
- Investment banks/advisors: Investment banks help to connect companies with multiple individual investors.
- Crowdfunding: Crowdfunding involves independently seeking investment from lots of different investors. Each investor usually only invests a small amount.
