Many small businesses reach a point where they would benefit from some extra capital to get them through growing pains more effectively, from staffing and HR hurdles to inventory and cash flow limitations. Deciding which option is the smartest financial move for you can be challenging and requires careful consideration. Should you borrow money that you must pay back with interest? Should you look to secure funding from small business investors via equity financing that will, at least temporarily, have a small stake in your company?
Choosing Between Debt Financing and Small Business Investors
Let’s take a quick look at the main differences between debt and equity financing. Debt financing can be a simple arrangement where you can quickly receive the money you need, and you will be responsible for paying the principal of the loan with interest by an agreed upon date. Whether your business fails or succeeds, you retain this responsibility. Equity financing involves sharing a percentage of your profits for a predetermined amount of time as well as potentially handing over a piece of ownership and some decision-making power in your business. Keep in mind whatever you give up in equity ownership is usually made up by what small business investors bring to the table like experience, connections and wisdom. At least, that’s a good reminder that the discussion and discovery process is as important for the SMB owners to evaluate the investors as it is vice versa. Sure, if your business succeeds the investors will have a share of the profits. However, if your business fails, they will lose their investment, while you the business owner are not indebted.
Questions and Considerations:
Here are the five questions and considerations to help guide your decision:
- Are you an established business with excellent credit?:
If your credit-worthiness is an issue, you may have difficulty securing a loan without paying an exceptionally high interest rate as well as additional fees. In this case, looking for small business investors to provide equity-based financing may be a better option for you.
- Are you comfortable with sharing some decision-making power in your business?:
If you are adamantly opposed to sharing any control of your business operations and management, you may want to stick with a loan. But if you think your business could benefit from the leadership and experience offered by an equity partner, and you are comfortable sharing control, partnering with small business investors could be the first step in generating new growth for your business.
- Do you need financing right away or do you have time?:
If you need immediate access to cash, you should choose debt financing. Some business loans can be set up in a matter of days or even hours. Finding the right small business investors is a process that should definitely not be rushed.
- How much capital do you need to raise?:
If you need to raise a large amount of money, your best option is probably to leverage equity. Small business investors tend to be better suited to provide substantial investments of capital, while banks maybe be wary of loaning large sums of money.
- Are you interested in more than raising capital?:
In addition to securing funds, are you also interested in gaining access to professional contacts, expertise, wisdom and leadership? If you are interested in mentorship or guidance, partnering with the right small business investors lets you tap into a wealth of knowledge, which can make a huge difference in the long-term success of your business. If your only interest, however, is in getting an influx of cash, then debt financing may be the right choice for your business.
There are many deciding factors to consider when you are choosing the best financing options for your small business. How do you determine what’s right for you? The choice may be complicated, but it doesn’t have to be difficult. The decision process is different for every business, but if you carefully examine each option in context with your business’ needs, you’ll soon be on your way to making the right financial decision.