When starting a small business, or taking one to the next level of development, one thing that just about every entrepreneur needs is capital. Money is the thing that takes great ideas and cunning plans into a successful reality – and it’s always the one thing that small businesses can never seem to get enough of. Most commonly, capital is acquired through one of a few channels: personal funds (hey, I bet your kids don’t even want to go to college), loans, and investment capital. More often than not, small businesses are fueled by more than one of these three.
One of the biggest misconceptions about raising small business capital is that loans are the worst possible option, and that landing a sizable investor is the dream come true. The myth is that small business loans will weigh you down and rob you with interest rates, and that investment capitalists are like fairy godmothers who swoop in and make everything work perfectly. The truth is a little different: not only is taking out a small business loan a perfectly healthy, valid business decision to make, it is frequently better than working with an investor. No, seriously. Here are three reasons why:
- Lower cost
There are a number of factors that can influence the actual cost of debt capital, but in most circumstances, they carry an interest rate of 15-18%. Equity investments, on the other hand, can frequently come at rates of 25% per year or even higher.
- Less personal commitment
When you get down to it, the fundamental difference between debt capital and equity capital is a matter of relationships. If you take out a small business loan, your lender is likely interested in the numbers: how your business is faring financially, but mostly that you are repaying your loan in a timely, consistent, responsible way. As long as that is happening, your lender is unlikely to show much interest in the rest of your business affairs. An investor, on the other hand, is a person who is putting up their money as a sign of faith and support that your company is going places. Managing your relationship with an investor is a lot more complex than dealing with a lender.
- Shorter commitment
When you think about the relationships between you and a lender, and you and an investor, debt capital offers, by far, a shorter, simpler arrangement. With an investor, not only will they be interested in the overall health and direction of your business, but as time goes by, their personal priorities might change. No matter how well your business is faring, there’s really no guarantee that your primary investor(s) might not just decide they aren’t interested in you and you company anymore, or that they won’t elect to move their funds elsewhere. With a small business loan, you’re locked into a shorter arrangement with more predictable terms.