Raising Money for Your Small Business: Loans vs. Equity Investments
Here’s the lowdown on whether to borrow money or sell part of your business to an equity investor.
To raise money for your new business, you must decide whether you want to borrow money or sell ownership interests to equity investors. Often, you may not have many options -- the person with money to lend or invest will obviously have a lot to say about it. But you should understand the pros and cons of choosing one over the other.
Taking Out Business Loans
Borrowing money to fund your business has many advantages. Often, you'll borrow this money from a friend or family member, but if you're lucky, you may be able to borrow from a commercial lender too.
Advantages of Borrowing Money
The main advantage of borrowing money is that, while the lender will charge you interest for using the money, the lender won't have any say in how you run or manage your business. More importantly, a lender won't be entitled to any of the profits you make; all you have to do is to repay the loan on time. In addition, you can typically deduct the interest payments (but not principal repayments) as a business expense.
If you can borrow money from a friend or family member, you'll typically pay a lower rate of interest than if you borrow the money from a commercial lender, and you can avoid paying the loan fees commercial lenders tend to charge. As an added bonus, you may be able to negotiate more flexible repayment terms than a commercial lender would permit.
Disadvantages of Borrowing Money
If you borrow money, you may be committing your business to a fairly large business expense. You may have to make loan payments when your need for cash is greatest (usually during your business's start-up or expansion). And if you have problems paying the loan back or keeping up with the payments, you can ruin your relationship with family or friends.
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