A business loan differs from that of an investor in the sense that you won’t be required to give up equity within your company. You’ll also have to consider the risk versus the return — if you use a £400,000 loan and turn it into £1m in profit, that profit is all yours, but if you make a loss and your business goes bust, the loan must still be repaid.
When it comes to choosing between an investor or a business loan, there are different benefits that you’ll have to consider.
What to look for in an investor
Raising money through investors is usually a quicker and easier process than securing and taking out a loan. However, you’re risking loss of control of your business and may not be able to fully negotiate the terms you want. When deciding on how to pick one, remember to make sure they have:
- Experience in your industry — It’s extremely valuable to have an investor who can not only advise but also teach you and ask you the tough questions others won’t.
- Trust in your vision — As the founder of your business, you need someone to advise and navigate through unfamiliar situations. Find an investor who understands the vision you have and will help to make the right decisions along the way.
- A valuable network — Knowing the right people can offer up new opportunities. An investor should have a list of connections that can help move your business forward.
- Are a natural fit to your culture and brand — When you pick an investor, it’s more than likely that they will have a say in making decisions that are related to your brand. Choose an investor that would be a great fit for your brand and would seamlessly integrate into the work culture.
- A willingness to commit— While it’s good to see that your potential investor has a string of successful investments behind them, you have to consider ‘can they make time for my business?’ If an investor will bring money but little else, it might be worth considering looking for someone else who will put in the time and effort.
What types of investors are there?
A venture capitalist (VC) will look for a business that has the potential for a lot of growth. They’re usually private investors who use their own money to help fund businesses and often aren’t associated with a group.
Angel investors are different to most other forms of investors in that they specifically invest their own money in new startups that have yet to establish themselves. To find opportunities, angel investors will network across different platforms like Angel Investment Network to seek out companies that require a financial investment.
Business incubators are designed to help start-up companies, early-stage businesses, or even just a business idea grow. They’ll offer support and resources — like access to networks, mentors and investors— to young companies who would struggle to find these things alone.
Accelerator programs support early-stage and start-ups businesses through short-term mentoring, expert-resources, training, and investments. Depending on the structure and objective of the business, accelerators may be funded by venture capital investors, public bodies or large corporations — they can even be companies or colleges.
Along with offering money to help the business, they may also offer:
Crowdfunding is a way of raising money to finance your business and its projects. Instead of offering interest or ownership, crowdfunding typically involves delivering an early-access version of the product or service you’re selling in exchange for funding from the general public.
What is a start up loan?
Start up business loans are unsecured UK government backed personal loans of up to £25,000 that are used to help start a new enterprise or grow an existing one, as long as it has been trading for less than 24 months. This means they’re available for new business owners during their first two years of operating, not just available to those who are yet to start trading.
Start up loans needs to be repaid, along with interest, over a specified period of time. But there is a key difference – unlike other types of business loans, start up loan agreements are actually made with an individual, rather than a business.
Things to consider
They are a more flexible option of gaining finances over an investor, and are more straightforward in regards to paperwork and liability issues. There is also no restriction on the type or size of your business when it comes to start up loans. This means a home or microbusiness could apply.
The cons of a business loan are that they may require collateral. You may have to put up collateral which the bank can take if you fail to make or miss any payments. If you’re required to sign a personal guarantee with your business loan, this means that the bank can come after your personal assets. Remember that you must also repay the loan regardless of what financial situation your business is in.