When businesses need capital, be it to expand the business, to take a gleaming business expansion opportunity that you may not have the funds for, or just to weather through a rough patch in your business, there are always two options to these scenarios – either you sell off a part of your business, or you take a business loan.
Here are a few considerations when you are stuck at the crossroad.
Raising an investment is like being in a marriage. The commitment is much higher as compared to taking a loan. If you are selling a part of your business to raise investment, it would be harder to “buy it back” unless you buy out the other person’s shares. Therefore it is like being in a marriage as you have to treat this person as a partner in your business as this person has some say in your business’ decision-making capabilities.
As for taking up a loan, the commitment is lesser as the person that loans you the money does not have a say in your business at all, and you can always find capital to buy a loan out. The only commitment is the repayment of the loan plus interest charged on top of it. When it’s an investment, the investor will have a right to refuse your buyout, or he/she could make it super expensive for you to do so.
There are two main costs:
– Monetary costs
– Time costs
If you choose to raise investment for your business, time cost would be more burdensome. Depending on the amount, raising capital from investors can take a long time. You can look at a time-frame of about six months or so, plus most of the time will go into:
– Building relationships with potential investors to build trust
– Tweaking and re-tweaking investment decks
– Pitching to 10, often 30 and above investors
– Going through a painful due diligence process
– Going through investment terms sheets
The time taken to complete the process is tedious and time-consuming. However, there is no interest added in the loan agreement, but you pay them with a part of your company.
As for loans, the time cost of raising a loan from banks is relatively high too, especially if your business is not doing that well. However, you’re usually looking at a period of about two weeks to 3 months, considerably shorter alongside a tonne of paperwork that you need to prepare for their risk assessment. But for loans, you have to factor in the cost of interest to the capital.
As a business owner taking a loan, you have to be mindful of your business projections, making sure that the loan is used for the right reasons to increase your business’s sales and profit to cover the cost of interest and meet repayment schedules. This limits the use of the loan funds to take unsure risks (for example, expanding into a new product line) or your business can risk going into bankruptcy.
On the other hand, online loan apps, like FS Bolt, are great for business loans as they have streamlined the application process that you can now do the entire process on your mobile phone. Plus, it only takes 2 hours for them to approve your application and have the funds wired within the next business day if everything is in order. Pretty revolutionary.
Business financial situations
To get approved for a loan, your business has to:
– Have a good track record that shows that you are a good paymaster.
– Have substantial contracts in place that can represent business growth or a steady future stream of income.
Without either of these, the chances of getting a loan can be low.
As for raising investments, the risk profile is more diverse. You can get investments from:
– Friends and family where they basically will buy a piece of your company just because they trust in you and your abilities.
– Angel investors that are sold on your dream of potentially building a big company.
– Angel investors that have connections that could add to your business.
– Venture capitalists that will back you from the seed stage to Series A, B and C investments if you have a good track record, proven market demand, a defensible product and a viable route to an exit.
– Private equity firms with more significant investment quantum for more mature businesses.
So, if your business has high risk, but has a high potential for growth, then it’s more feasible to raise investment than getting a loan.
In business, nothing beats an intimate understanding of the business you run. Only you know what’s best for you and your business. This helps in the selection of a financing option. If taking a loan does suit your business profile, do consider applying via FS Bolt and they will give you an up to $100,000 business loan. Aside from that, if you submit complete documents, they will let you know if you have been approved within 2 hours.
Funding Societies – Capital Markets Services License No: CMS100572-1 issued by Monetary Authority of Singapore (2016)