Capital is the lifeblood of a small business. Without capital, it will be hard to finance necessary purchases such as raw materials or finished goods for inventory, office supplies, and equipment. Unless you have a lot of money at your disposal, paying expenses out-of-pocket may drain you of your finances later. Getting an outside funding is the next best thing.
To secure capital, small businesses have several options. Getting a small business loan is one. Another is seeking an angel investor. Now, which option to choose?
Weigh your options carefully as this decision will affect your business long term.
If you’re on a fence and don’t know which option is best for your business, read on.
Small Business Loan
When you borrow money to finance your business, you incur a debt. Small business
loans are term loans that need to be repaid at a certain period of time. You apply for a bank loan then get a lump sum. Then you will pay a fixed amount, which include the principal plus interest, monthly or bi-weekly, depending on the terms, until the loan is paid off.
The primary advantage of a business loan is you get to keep full control of your
company. The bank does not meddle with your business operations and decisions. You get to run the business the way you see fit.
The main disadvantage is the application process could be cumbersome. The owner has
to show proof of the business' operating history and its profitability or a positive cash flow. The owner may need to secure a lot of documents as proof such as tax returns, bank statements, balance sheet and income statements.
Another disadvantage is if the business fails, the owner has to pay back the debt. Since
you owe the bank or credit union some money, you need to pay it back. If you cannot pay the debt back, this may lead to legal repercussions.
Funding from an Angel Investor
An angel investor provides capital to a business in exchange for owning a percentage of
the business. Most angel investors invest money in start-ups. Some of the most famous businesses that secured funding from an angel investor when they first started include Facebook and Uber.
The typical seed funding that an angel investor puts up is between $25,000 and
$100,000. Since the investor joins the business in the early stages, such as before the product or service launch, the investment made is not usually high compared to that of a Venture capitalist, whose investment amount often runs above $1 million per business.
The main advantage of seeking funding from an angel investor is the investor shares the risks together with the small business owner. If the business fails, the owner is not expected to pay the angel investor back. The investor sinks or swims with you.
Another advantage is an angel investor can coach or provide small business owners with expertise, guidance and advice. Most angel investors are seasoned business owners themselves. They know how to run a business and what needs to get done.
The main disadvantage of an angel investor is you cannot have total control of your business. An angel investor is co-owner of the company. He or she shares in controlling the reins of the company.
As a business owner, it is your responsibility to choose your method of procuring investment. Keep in mind that the future of your business rests on your decisions. Whatever you choose, these two options are both effective if you invest the money wisely.
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