You might be crystal clear on the type of business you’d like to start, but you might not be so certain on how you’d like to finance that business. In addition to traditional bank loans, you also have the option of utilizing what’s known as equity to pump lifeblood into your company. To make a well-informed decision, learn more about the advantages and disadvantages of both options.
Businesses that have ongoing financing needs are usually better off with commercial loans. They’re often less of a hassle when you have access to a steady cash flow, and you’re likely to have more collateral to put up if yours is an established small business.
One of the absolute best advantages of loans is you retain full control over your business, mainly because your lenders don’t have a say in how you operate your business, nor do they have any claim on any profits you make. Another great thing about loans is that any payments you make towards the interest you owe is considered a business expense, which you’re sure to appreciate when tax season rears.
A downside to opting for a loan to finance your small business is that you have to make sure you have enough profits coming in that you can make your scheduled payments. This can be especially challenging during the slower months of the year, so you might want to have emergency reserves stashed away in case you’re ever unable to fulfill your obligations. Small business owners also have to think about the fact that they will likely have to use their personal property as collateral. Finally, loans also come with the possibility of you being sued whether the loan is secured or unsecured.
For business owners who are just getting things up and running, it often makes more sense to sell an equity stake in your business in order to finance your operation. With equity, there’s no need to fret about repayment. A majority of companies don’t make a decent profit for the first few years of business, which means it’s unlikely they’ll be able to pay back their loans.
While you might feel giving over an equity share of your business is relinquishing control, doing so can actually be quite beneficial. Experienced investors will be able to help you with the everyday tasks of running your business and creating professional connections, as well as offering you advice on building your company. You might also like the creativity and flexibility that often comes with equity investments.
As for the downsides, there’s a chance equity investors might choose to oust a founder, one who has spent several years with the company. Small business owners also have to consider the fact that equity investors are entitled to a portion of the profits, which could be funneled back into the business. Finally, you also have to make your equity investors aware of all essential business events. If you don’t, they have the option to sue should they ever feel their legal rights have been violated either intentionally or unintentionally.
Speak With a Lawyer
Once you’ve had a chance to think over the above information, you may also want to consult with a lawyer to truly make the best decision, even if this isn’t your first time owning a small business. You might not be aware of the latest laws, regulations and requirements, and you may be more confident in your decision and your business after you’ve spoken with a qualified attorney who’s experienced in business law.
As you’re financing your business with a suitable cash flow, finance yourself with knowledge. Many considerations have to be made throughout the course of operating your business, and the right information can make for smoother sailing.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.