Small businesses who are seeking capital basically have two options—finding of business loans or either securing of equity investments. In order to determine as to which is better for the borrower’s business, it would, however, depend upon the type of business which the borrower owns, his creditworthiness, and his willingness in order to have someone looking over his proverbial shoulder.
Difference between the two.
- In business loans, the borrower maintains complete ownership of his business and also remains the only voice in running it.
Whereas in equity investor, the borrower may lose full control over the direction or either day to day operations of his business. Investors may, however, want to be part of the board of directors and oversee operations.
- In a business loan, the borrower can use the money from a business loan in any manner which the borrower sees fit . Whereas in equity, the Venture capitalists however typically invest in the businesses that however have the potential in order to offer huge returns on their investments (i.e., the software companies, scientific inventions) and they are however generally uninterested in most of the small businesses that they thus don’t forecast the huge potential growth.
- In a business loan, If the business fails, the borrower would however still have to pay back the loan in full, plus interest. Whereas in equity, If the business fails, the borrower typically is however not supposed to pay back the investors (in the absence of any fraud, of course).
- In a business loan, If the borrower has poor credit, he might however not be able to get a loan. Whereas in equity, the Investors may be better suited in order to provide the large sums of capital. Banks are however leery of lending the very large sums because of the risk of default.
- In a business loan, If the borrower needs it, repaying a loan is thus considered as a terrific motivator to working extremely hard for his business in order to succeed.
- In equity, the Repayment terms are however more flexible than that of the business loans.
- In a business loan, The lender, however, doesn’t get any kind of portion of his profits or say in the business.
- In equity, the borrower may, however, are required to share a larger portion of his profits with the equity investors.
Ultimately the borrower would have to determine as to how the advantages and the disadvantages of a business loan and the equity investment apply to the borrower and his business. If his business plan, however, projects potentially the large growth, the equity investors may, however, be attractive for their lenient repayment terms, the low risk (they won’t, however, sue the bborrower unlesshe defrauds them), and business acumen.
On the other hand, if the borrower however projects modest growth (i.e., if the borrower isn’t planning on however running a large business enterprise) or he wants to complete the autonomy in making the business decisions, a loan might however be better for the borrower .
Whichever option the borrower chooses , he must thus be sure in order to carefully contemplate the pros and cons of a loan or equity investment, and he would thus be able to make a well thought through decision.