News

Loans or Equity the big question...

Emma Neal

06 Mar 2015

Many businesses seeking cash to start-up or grow face the question which is best for me, a loan or selling some shares to an equity investor? Others just assume one is better than the other. Some don't even think about it or won't even consider "selling part of my business" to an investor like a VC (venture capital Fund) or Business Angel (rich individual investor).

There are a lot of pros and cons to each approach but to at least help you start to think about this choice here is my list of what each involves. Then I suggest you take some direct advice as every business is different and getting this wrong can cause you real problems.

Loans

The vast majority of small to medium businesses in the UK depend on some for or loan at some point. It’s easy to find, from high street banks to Peer-to-Peer lenders on-line and specialist funds like the Start-up Loan Fund or the North East Micro Loan Fund (see below). Some of the key issues then are:

  • Loans are relatively cheap in that all the charge are some fees and simple interest
  • You need to be making sales or have cash to start paying interest from day one
  • Many lenders take some form of security to protect them if you go bust so…
  • Read the small print…
  • Watch for other terms attached that can include taking over if you default
  • Always check you can pay the interest and capital you may need an accountant to check this.

This last point is really important as you and your business should check you can afford the loan interest and repayments. If you are unsure take advice!

Loans are good for businesses that:

  • have a track record of sales and need finance to grow
  • want to buy equipment and know they can increase sales
  • are starting provided you can sell stuff and generate cash from day one
  • need to cover a slack period provided they can see future sales to pay the loan.

Equity

Simply put an equity investment is one where someone, a Fund or individual buy shares in your business so you can use the cash to start up or grow. In return the investor will own a share of the business and at some point want their money back with a return.

Equity investment, venture capital, or cash from a private investor usually has a lot of terms and conditions attached, so check these carefully and get experienced advice. Investors are taking a lot of risk and normally they want a much greater return than simple interest. They often won't take any security but can take over your business if things don't go well.

However equity investors, although not for everyone, give some key advantages to small businesses and for some are the only choice if you are starting out and not making sales to pay loan interest or you need a very large amount of cash and could not afford to pay the short term interest.

Equity deals vary and it is not possible to summarise all options here but some key features to notice are:

  • You will be essentially bringing another partner into your business as they will own part of it
  • Venture or equity investors want a very high return
  • You need to have a growing business to convince investors they can get the return
  • Most equity deals mean you will not have to pay any short term cash back
  • Equity investors share the risk with you in a way that lenders don’t usually
  • Many investors can and do help a lot with advice and hands on help
  • Terms and conditions of investment agreements are complex, you will need advice
  • It is essential to get on with your investor, for all the above reasons
  • If your business won’t make sales for a while, venture investment might be essential
  • It can take 3-6 months on average to raise venture capital or equity investment.

These days there are even more sources of equity and loan investment then just banks and VC's and a lot of choices including Crowdfunding on-line.

So, as I said, the decision can be complicated and many businesses take both types of investment. Key is ensuring you have the information you need to make the right choices.  If you want to find out more contact us and come on one of our courses! At the very least make sure you give a lot of thought to this and take some advice.

See the article on Bdaily HERE


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