If you require funding for your companies there are two basic categories to consider. Outside investment, meaning that the investors don’t charge interest but take on partial ownership of your company, and a business loan. Which option you choose depends on a number of factors which we will discuss in today’s article.
First there is the issue of ownership. Many new potential business owners don’t like the idea of giving up partial ownership of their company. If you have a good idea and no way to fund it venture capital can be a great tool to use, but you give up some of your ownership. It is not uncommon to give up more than 50%, at which point you are just another share holder like any other, there is no guarantee that your ideas will decide the direction of the company. If this is something you simply don’t want to do, a business loan is a better option. You will have to pay it back of course, but you will maintain full control of your company.
There are potentially strong economic advantages to both loans and outside capital. This really depends on how the scenario works out. Let’s assume for the sake of argument that you are able to acquire equal amounts of borrowed money or invested money. The first couple years of a company are the most critical, and your company is most likely to fail during that time. If you are repaying the principle plus interest on a loan, your daily operating budget is smaller. This means you have less time to reach profitability before the money runs out (everything else equal as stated above). On the other hand, if you can survive long enough to reach profitability while repaying the money you borrowed, you stand to gain more personally because you aren’t splitting the profits among your investors. This isn’t an easy choice to make and you should attempt to realistically plan for all eventualities whenever possible.
Whether or not you seek venture capital is really a function of ownership. You will lose some control over the decision making process, and ultimately have to share profits. On the other hand you are also sharing risk. A business loan on the other hand can be very expensive to begin with, and this expense must be factored in when considering the race to profitability. Many new company owners don’t really take home a profit from their company for a year or more.