Starting a new venture and not sure whether a business loan is a better source of financing than equity investment? Read on to learn why the former is the way to go in certain situations.
While starting a company is exciting, raising funds to get it off the ground is a major challenge. Let’s face it, financing is the mainstay of a business venture, and lack of it can spell doom, no matter how fantastic the initiative may be. But where to find resources is the question at hand. Debt financing such as business loans and equity financing are two options that can be explored by budding entrepreneurs. While there’s no hard and fast rule, borrowing money makes more sense than equity funding. Let’s take a closer look at why and when business loans are a better move for start-up capital.
- Retain Control over Business:A plus point of securing loans is that your ownership is intact and you have full control over your business. The main concern of lenders is the repayment of the loan over the agreed period of time along with interest. They have no say or interest in the day-to-day running of operations. Equity investors, on the other hand, become co-owners with a decision-making power in exchange for capital.
- Traditional Collateralised Loan: Lenders provide both secured and unsecured loans. The former involves some kind of security as an assurance that the money borrowed will be repaid. If you have valuable assets like stock, real estate, insurance policies, savings certificates, etc. that can be used as collateral, a large loan can be procured at a lower rate of interest. It must, however, be noted that if there is a default, the collateral is sacrificed for repayment of the debt.
- Need money in a hurry: Getting a loan from a bank or NBFC is a quick procedure. In fact, money often gets disbursed within a few days. Securing equity capital, in contrast, involves paperwork, legal documentation, disclosures, and other formalities. It can take a good 3-6 months for you to get the funds. If your monetary need is urgent, taking a loan is the ideal solution.
- Loans a Cheaper Financing Option:Business loans are cheaper for raising funds in the long run. The lender has to be paid a fixed rate of interest at the agreed periodical interval on the borrowed amount but is not entitled to receive a portion of the company’s profits. While there is no repayment stipulation in equity funding, you lose sole ownership and have to forfeit a share of future profits indefinitely for the financial help.
- Simple & Straightforward Process:To get funding for your initiative you need to excite and grab the attention of an equity investor with an impressive pitch deck. Bear in mind that despite the effort put in making the presentation, there is no guarantee the investor/investors will come on board. Borrowing capital from moneylenders conversely is a simple and straightforward process. They are least interested in the future prospects of your business as their prime concern is getting back the principal amount with interest.
In generalbusiness loan for new business is a better source of financing when you want complete control of your company, need cash urgently, have collateral or are looking at a simple, no frills disbursal of funding. Remember, tapping on financial resources for your startup is not a trivial matter; hence it’s essential to weigh the various considerations carefully before determining which of the two options is right and works for you.