64% of startups use savings and family investment to start a business. And, no, family investment doesn’t count as an investor. But that still means that 36% of businesses will either have to get a business loan or seek out business investment opportunities. Interestingly, one study found that only 1% of startups secure investment capital. That would imply 35% secure business loans. Let’s explore why that happens.
Understanding Business Loans
A business loan is like a traditional fuel boost for your enterprise. Some of the best business loans will have a fixed and low % APR. The standard seems to be between 5 and 10% fixed APR, but it’ll also depend on the individual lender, your credit history, and your investment.
A local business owner signing a loan agreement with a banker.
Once decided, you’ll get a lump sum from a bank or financial institution and agree to pay it back over time, plus the fixed APR interest. It’s a straightforward path. You retain full ownership and control, but those regular repayments are non-negotiable. Missing them will have terrible consequences for your business, credit score, and future credit needs.
Pros of Choosing a Loan
1. Maintain Ownership: You keep 100% of your business. You don’t need to share profits or decision-making power.
2. Tax Benefits: Interest on business loans can often be deducted from your taxes. That’s always positive if you have a high APR.
3. Fixed Repayments: You can plan your finances around predictable loan repayment. They should remain constant throughout the term.
Cons of Going for a Loan
1. Debt Obligation: The loan is a constant liability on your business’s balance sheet.
2. Credit Score Impact: Failure to meet repayment commitments can severely damage your business credit score.
3. No Additional Expertise: Unlike investors, lenders don’t provide business guidance.
The Investor Route
The investor route is tricky – it must be if only 1% secure it. Still, you get funds and expertise in one. Most investors are first business owners or people with extensive industry insights.
Pros of Bringing in an Investor
1. More Than Money: Investors often bring invaluable industry insights, mentorship, and networks.
2. No Repayment Stress: You aren’t tied down with monthly repayments. Investors recoup their investment through business growth and profits.
3. Shared Risk: Investors share the journey’s risks. They provide a cushion during challenging financial situations.
Cons of Partnering with Investors
1. Diluted Ownership: You’ll need to give up some of your business. That can mean sharing profits and possibly losing some control over business decisions.
2. Pressure to Perform: Investors are in it for growth and returns. That might pressure you to focus more on short-term gains than long-term vision.
3. Potential for Conflict: Differing visions between you and your investors can lead to conflict.
Making the Choice – Loan or Investor?
Should you choose a loan or an investor? After looking at the statistics in the introduction, you might have no choice but to get a loan.
Yes, an investor has the perks mentioned above, but they’re like a unicorn. Impossible to come by. Well, not impossible, but they might as well be. Loans provide a clear, predefined structure for repayment. You know what you’re getting, and the banks won’t become involved with your business unless you stop paying them.
But the decision is yours. If you can find a unicorn investor, maybe it’ll work for you, but personal or bank investment seems to be the more viable option.
Strategic Considerations
Think strategically. Not necessarily when choosing an investor or loan, but how much money you need. Cash flow and lack of it is one of the main reasons businesses fail. 82% of startups fail because of a lack of cash flow and financial backing.
The stage of your business’s lifecycle is crucial – newer enterprises with less financial history might find it more challenging to secure favorable loan terms. Conversely, more established brands could prefer the straightforward nature of loans to maintain control and predictability.
Industry dynamics are another critical consideration. The agility and networks that an investor can provide might be more beneficial than the rigid structure of a loan.
The urgency and flexibility of funding are also vital to consider. Loans might offer quicker access to funds. Not every band has the time to wait.
Aligning with Your Business Goals
Ultimately, your financing decision should be a strategic move that aligns with your business’s long-term objectives and core values. If maintaining autonomy and having a clear, predictable financial path is what you’re looking for, it’s a loan. If you want someone to share the burden of the business and ultimately own a part, it’s an investor.
It depends on your goals, business plan, and what will work for you. And if we had to guess, your goal would be to grow your business. Having an investor or a loan doesn’t necessarily guarantee that.
Whether you choose an investor’s strategic partnership or the structured path of a loan, the decision should align with your business’s core values and growth strategy. A business loan is favorable, and as you can see from the statistics in the introduction, it isn’t easy to find an investor who’ll give their money to a startup. You’re far more likely to secure a quick business loan.
