Today will be comparing the advantages and disadvantages of business loans and venture capital. In short loans are funds which you must repay plus interest and capital is money that is invested in your company in exchange for partial ownership of your company. Both have advantages and disadvantages and there is no single correct way to fund your company.
First let us discuss the option of business loans. Many new owners consider this to be their best option in that they do not want to give up any ownership in their company. This is understandable as you have likely spent a great deal of time coming up with your company idea and you do not want to share it with others who may perhaps not share your vision. It is important to understand however that your loan represents an additional expense for your company and you should think long and hard about the effect this will have on your profitability especially in the first few years where profit margins tend to be the lowest. If you cannot foresee your company successfully reaching profitability while paying for the loan plus interest you should instead consider venture capital.
Venture capital has many advantages as well. For one you will not need to pay interest on any type of loan and fax will not need to begin payments towards the investors in detail of your company is profitable. This means that you will have a greater chance of reaching profitability before you run out of funding. Also it may be possible to receive additional investment as your company grows based on the success of your company up to that date. Of course the disadvantage is that in the event that your company is successful you will have to share your profits with these investors. So you take on less risk but you also receive less reward in the event that you are successful. Also if you give up more than 50% of your company you will lose the controlling share which means that your vision will not necessarily dictate the actions of the company. Instead you will fall into more of a managerial role with the investors making the final decision of how things should operate. Many new business owners do not find this prospect appealing and as such decide to avoid venture capital whenever possible. The decision is not only a financial one but also an emotional one and you should try to maintain your objectivity while determining the best course of action for your company.