Today will be comparing and contrasting venture capital versus small business loans. Both of these options are viable for new companies and you should consider them both carefully. Venture capital in essence is a way to fund your company without having to borrow money. Instead of borrowing you will have to share a portion of your company with your investors. Loans and the other hand do not require you to share any ownership of your company but you must of course pay the principal plus interest to the lender. We will be comparing these two options further in today’s discussion.
Venture capital can be a great way to fund new companies especially those that have very narrow profit margins during the first few years of operations. If you expect to have very thin margins you should consider this as your best option as you may not be able to afford the loan payments plus interest during this critical first couple of years. One thing to consider of course is that you will be giving up ownership of your company by following through with this option. Not only will this mean that you will have to share profits with other individuals in the event that you are successful but there may be circumstances under which you will lose controlling share of your company. How much of your company you must lose will depend on your negotiations with the venture capitalists as well as the amount of funding which you require.
Business loans and other hand offer you 100% ownership in your company and this is very appealing to many new business owners. However you must calculate in the loan payments plus interest in your calculations for the start up cost of your company. There may not be enough money in the budget to pay for the loan in addition to all of the upfront expenses. Remember many new companies do not make any profit for a year or more and so you must have enough funding for that period of time and that includes the loan payments on the loan which you are using to create your company in the first place.
So there you have a basic comparison between venture capital and small business loans. With capital you do not have to worry about repayment or interest but you lose some ownership. With loans you do not lose any ownership but you are taking on additional risk and costs during the critical first couple of years of your company.