Does Your Small Business Need a Partner, or Just a Loan?

Small businesses usually do not have large reserves of cash that can be easily accessed to meet temporary or longer-term funding requirements. When you came up with the idea to open your small business, you had to decide how you would obtain the necessary startup capital. Unless you had a sufficient amount of personal savings and were willing to use them to fund your small business, you had to look elsewhere for the money you needed.

Whether you are just starting a new business or are already up-and-running, there are two options for raising working capital or financing future capital expenditures. You can either try to borrow the money, or you can raise the money by offering equity in your company. In many cases, a small business may use a combination of the two sources for raising funds. One option is not necessarily better than the other. Knowing the pros and cons of choosing either option can help you make the best choice for your small business’s capital needs.

Using Equity to Raise Funds

Raising capital by selling shares of your company stock to investors in return for an ownership stake in your company is what is known as equity financing. As a small business owner, you can sell an interest in your business at any stage of its existence or growth. You can sell shares to a single individual or a large group of investors. Shares may be sold or distributed privately or they can be offered to the general public. Every shareholder is given certain rights. Those rights include, but are not limited to the following:

  • Ownership of a portion or percentage of the company
  • The ability to transfer ownership
  • Entitlement to dividends, if and when issued
  • The ability to inspect/review corporate books and records

Venture capitalists provide infusions of cash to small businesses in return for receiving shares of the company’s stock. Generally, they do not get involved in the day-to-day operations of a business, but may offer advice and direction on the future path they want the company to take. Their interest is in maximizing the return on their investment by participating in the growth and success of the company.

A partner can be either active or passive. A passive partner may call you once in a while or visit your business on occasion to “check up” on its status and progress. An active partner is likely to be more closely involved in the different aspects of the business.

Pros of Taking on a Partner

  • Can provide needed capital without putting the company in debt
  • Can share in the work required to run the business
  • Can offer expertise and new ideas that could benefit the business
  • Can help free up some time for you to focus on other aspects of the business

Cons of Taking on a Partner

  • Future profits have to be divided based on percentage of stock owned
  • Loss of complete control over how the business is run
  • Potential for disagreements, arguments, and general discontent

Using Loans to Raise Funds

Borrowing money from a bank or other lender may be the right solution for small businesses in need of funding. The main benefit is that you can get the working capital you need without giving up any equity in your company. Take a look at some of the other pros, and a few of the cons, of taking out a loan.

Pros of Taking Out a Loan

  • Do not have to give up any control of your company
  • Do not have to answer to any shareholders
  • Can borrow from a number of different sources
  • Can compare offers and select terms that are best for you and your business

Cons of Taking Out a Loan

  • Adds debt to your balance sheet
  • Requires you to allocate money to pay back the debt that could be spent elsewhere
  • May limit your ability to borrow more money in the future

So, does your business need a partner? Giving up equity in any small business that has the potential to grow and expand in the future is always a tough decision to make. Once you relinquish a part of your company, you will have to share the profits and answer to others. If you are able to run your business successfully on your own, and all you need is an infusion of cash, you should think long and hard before taking on a partner.

As long as you have a good plan for how borrowed money will be used and a reasonable expectation of being able to comfortably pay back the money you borrow, getting a loan, rather than giving up equity, would seem to be the more appropriate path to follow.

Every situation is different and it certainly makes sense to look into all of your options before choosing a way to raise money for your small business. In some situations, equity is the way to go. In other situations, a loan may be your best working capital option.

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