Deciding to create a startup businesses from scratch can be both an exciting and rewarding venture, but does not come without its challenges. One of the first obstacles which many budding entrepreneurs encounter on their path to success is acquiring the necessary funding to start/continue business operations.
Nowadays, there are many different ways you can fund your business, with different methods suited different business types and financial requirements. As such, here is a look at how equity investment measures up against a regular loan for funding a business.
If you are willing to give away part of your business to get its feet off the ground, then equity funding may be the solution. This involves acquiring the necessary funding from the likes of angel investors or strategic partners (or potentially even crowdfunding sites), often by pitching the business idea/plan to them.
Much like an investment in the stock market, your business and your potential as its leader will be carefully analysed by the person or people you seek money from. How much of your business you give to the investor will likely depending on the amount of funding you need.
Using a loan (such as a bank loan) to fund your business could be considered a far more traditional method. Rather than having to give away equity, you simply acquire a debt (in return for funding) which must be paid off over time, usually with profits from the business.
You still need to convince the lender that your business will be a success, though, and the global financial crisis a decade ago has caused many established lenders to close their doors to startups. With that being said, there are still plenty of alternative lenders available.
Which is Better?
The truth is that neither of these methods is truly ‘better’ than the other, given that they are each suited to your individual needs as a business owner. It may be more difficult to acquire a loan from a traditional lender, but they are likely a much better option for the long term financial success of the business (all profits go to the owner once the loan is paid off).
With equity funding, however, you are more likely to be able to have access to a greater amount of money, and can often benefit from the advice and experience of a private investor.
Ultimately, then, the decision is down to you as a business owner. Both methods are effective in helping you start/grow your business, so look at your core business objectives and then decide which method suits your needs the most.