Starting a business is costly and few people have the funds to do it themselves. Business loans are one option, but lenders will generally be more restrictive in how much money they give along with setting many other limitations. As a result, many keen entrepreneurs turn to investors for financial support. The investors offer money and then when the business is making enough profit, these investors get their return. Seeking out investors may seem like the perfect option but there are pros and cons to consider. Here are just a few of these pros and cons.
PRO: It’s initially cheaper and more flexible than taking out a business loan
All loan companies will charge interest, as will peer-to-peer lending sites and credit cards and most other forms of borrowing. Investors generally won’t charge any interest. This erases some of the costs for you.
Meanwhile, most loan companies will have a limit as how to much you can borrow dependant on the company or your credit history along with many other factors. Investors are likely to still have a limit as to how much they’ll spend, but you’ve got more flexibility when finding an investor, plus there’s more room for negotiation.
CON: Investors will cost you more money in the long run
Investors are hoping for success from which they can make a return and line their own pockets. Whilst you only pay back what you borrow from a loan company (plus a little interest), investors are out to get much more money from you in the long run. That said, by getting to this point, you’ve launched a successful business and may be able to justify this more.
PRO: There are tax benefits to investment
Payments made back to investors may class as ‘qualified dividends’. These are tax deductible expenses, unlike interest charges to a business loan lender. Be wary that this does mean extra admin. An accountant of course may be able to do this for you. Keep statements to help you do this and use a qualified dividends and capital gains tax worksheet with this – don’t say I didn’t warn you. Be aware that not all dividends may be qualified in certain circumstances such as the holding period not being adhered to.
PRO: You could get professional advice
Another pro of hiring investors over loan companies is the professional advice that you may get from working with them. They will be willing to give tips on how to make your business grow. They may even know ways of saving costs that could help you in the long run. They’ve put money into your business and so want to see a return.
CON: It puts added pressure on you to succeed
Of course, this eagerness to see a return could make investors very angry if your business turns out to be a flop. That’s their money down the drain after all. Having this pressure on your shoulders could make things a little more stressful.