Most people need financial support when starting a business. This often involves taking out a loan or seeking help from investors. Which is the best solution for funding your startup? This post compares the two funding options.
Borrowing vs seeking investment explained
First, let’s explain how each funding option works. Borrowing money to start a business typically involves taking out a loan either from a bank or private lender. You can also use a credit card. Borrowing means taking on debt, which you usually have to pay back in monthly installments for a fixed term with interest fees attached.
Seeking investment on the other hand involves giving away a percentage of your profits (i.e. ‘shares’) in exchange for a lump sum of money. You can connect with investors by using companies like engelinvest.co.il or by using crowdfunding platforms. You keep paying shares until the investor agrees to sell their share.
Why borrow money to start your business?
It’s often quicker to get a loan
Some loans can be applied for and approved in as little as 2 days. Seeking investment typically takes longer – you may have to wait several months to get approval from a VC firm or to reach your target through crowdfunding.
You know how much you’re paying each month
With a business loan, you typically pay the same installment amount each month. You don’t have to worry about calculating a percentage of your profits as you do with shares.
Paying a loan can help you build credit
Loans affect your credit score. While failing to pay them on time can damage your credit score, keeping up with repayments can boost your credit score.
You can eventually pay off your debts
You could end up paying shares to an investor forever. With a business loan, you will eventually pay it off, so long as you keep up with repayments.
Why seek investment to start your business?
If you make no profit, you don’t owe anything
The amount you pay to investors is proportionate to how much profit you are making. If your business is only making tiny profits, you’ll only have to pay a tiny amount to investors. And if your business is making no profit, you won’t have to pay anything. This is not like loan repayments, where you have to pay a fixed amount each month regardless of whether you are making a profit.
Investors may be able to provide mentorship
Many investors are successful business owners themselves. They want to see your business succeed, and so they are willing to provide mentorship.
Investors may be able to help with networking
Some investors may also have impressive connections. By knowing the right people, they may be able to similarly help you succeed and become more influential.
Your credit score may not be considered
While some investors will still run credit checks, not all investors consider your credit score when deciding whether to invest money.
Which option should you choose?
Borrowing money to start your business could be a good idea if you want funding fast or if you want to maintain full control over your business, as well as being able to easily budget what you will be paying back.
Seeking funding from investors could be a better option if you’re also looking for business advice and influence as well as financial support.
