Equity Investment or a Loan: Which is Best for Your Business?
When it comes to funding your business, two common options are to go with equity investment or a loan. It’s important to know the difference between the two and the advantages and disadvantages of both to decide which is best for your business.
Equity investment is money invested in a business by stock holders who only recover it when they sell to other shareholders, or when the assets of the firm are liquidated. Loans are simply the lending of money that must be repaid with interest in the future. This brief guide will help you work out which is best for your business.
If your business is young and expanding and you don’t mind handing over some element of control to others, then equity investment can be a good funding method for your company.
Equity investment isn’t the same as investing in stock with ATC Brokers. Its main advantage of using equity investment rather than taking out a loan is that you don’t have to pay any interest yet still get access to essential finance. Should the worst-case scenario occur, and your business goes bust, you also won’t have to pay investors anything (whereas with a loan the repayments would still need covering). This can be more flexible and if you choose the right investors, their advice and assistance can prove invaluable for guiding your firm forwards.
However, the loss of control can be worrying and there are examples where founders have later been voted out of their own companies by investors. Plus, equity investors will want to take a portion of the business profits, removing important funds that could otherwise be used to boost your business.
Taking out a business loan is a quick and easy way to access finance, though its suitability will depend on your cash flow situation and growth expectations.
You maintain full control over your business with a loan as the only obligation you have to the lender is to meet their repayment requirements. While there will be interest on your loans, the good news is that this can be deducted as a business expense for tax purposes. Plus, you can use the money borrowed for any purpose, without needing the lender’s permission.
You do have to pay back a steady amount, which means ensuring you make enough profits each week or month to meet the repayments. Sometimes you may have to use personal property as collateral to secure a loan, which means if the worst happens you personally may be at risk.
This should help you decide the best financing method for your business.