Business Planning: Loans or Investment?Posted by Jessica Oman
If you don’t have enough money to cover the start-up costs for your business, then you’re looking to someone else to give it to you. Whether that person is a lender or an investor depends on a few factors, but you can ask yourself a couple of questions:
- Are you willing to let someone else own a percentage of your company?
- Can you afford the additional cost of a monthly payment if you take on a loan?
Investors generally want their money back at some point, so if you give up part of your company, that won’t be enough forever. Investors also want to see a clear exit strategy – that is, how and when do you plan to extract the money out of your company and give some back to the investor? Are you going to sell the business? Go public? Seek acquisition?
Lenders are usually the best bet for small companies like restaurants and retail stores. You keep all the equity, and when the debt’s gone, it’s gone; you own the house. The risk is in being able to make those payments every month. Do you have a contingency plan in place in case your sales plummet? What will you do if interest rates increase?
There’s a lot to think about.
What are some more pros and cons of seeking investment versus a loan?
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