FORBES LEADERSHIP ENTREPRENEURS
When A Small Business Loan
Is Better Than An Investor
Newtek – Your Business Solutions Company Contributor
Follow
Jan 17, 2014, 09:30am EST
When starting a small business, or taking one to the next level of
development, one thing that just about every entrepreneur needs
is capital. Money is the thing that takes great ideas and cunning
plans into a successful reality – and it’s always the one thing that
small businesses can never seem to get enough of. Most
commonly, capital is acquired through one of a few channels:
personal funds (hey, I bet your kids don’t even want to go to
college), loans, and investment capital. More often than not,
small businesses are fueled by more than one of these three.
One of the biggest misconceptions about raising small business
capital is that loans are the worst possible option, and that
landing a sizable investor is the dream come true. The myth is
that small business loans will weigh you down and rob you with
interest rates, and that investment capitalists are like fairy
godmothers who swoop in and make everything work perfectly.
The truth is a little different: not only is taking out a small
business loan a perfectly healthy, valid business decision to
make, it is frequently better than working with an investor. No,
seriously. Here are three reasons why:
C Lower cost
ookies on Forbes
There are a number of factors that can influence the actual cost of
debt capital, but in most circumstances, they carry an interest
rate of 15-18%. Equity investments, on the other hand, can
frequently come at rates of 25% per year or even higher.
When you get down to it, the fundamental difference between
debt capital and equity capital is a matter of relationships. If you
take out a small business loan, your lender is likely interested in
the numbers: how your business is faring financially, but mostly
that you are repaying your loan in a timely, consistent,
responsible way. As long as that is happening, your lender is
unlikely to show much interest in the rest of your business
affairs. An investor, on the other hand, is a person who is putting
up their money as a sign of faith and support that your company
is going places. Managing your relationship with an investor is a
lot more complex than dealing with a lender.
When you think about the relationships between you and a
lender, and you and an investor, debt capital offers, by far, a
shorter, simpler arrangement. With an investor, not only will
they be interested in the overall health and direction of your
business, but as time goes by, their personal priorities might
change. No matter how well your business is faring, there’s really
no guarantee that your primary investor(s) might not just decide
they aren’t interested in you and you company anymore, or that
they won’t elect to move their funds elsewhere. With a small
business loan, you’re locked into a shorter arrangement with
more predictable terms.
Newtek – Your Business Solutions Company
Less personal commitment
Shorter commitment
Follow
Cookies on Forbes
Newtek is a brand of Newtek Business Services Corp. (NEWT: NASDAQ).
Newtek Business Services has been in business for over thirteen years,…
Read More
ADVERTISEMENT
Editorial Standards Reprints & Permissions
Cookies on Forbes