Business Loan vs. Equity Investment

So, you are in need of capital to start your own business or you are looking for funds to venture into certain projects for your company’s growth. Perhaps, you might want to seek for certain expansions for your business. All of which requires one thing to start with; more funds.

When it comes to this, we are usually down to two options: obtaining a business loan or looking out for equity investors. But we do know it is certainly not a choice we can make in an instant or without due consideration on both options as making rash business decisions can result in extremely dire consequences.

If loan comes to mind, Singapore business loans or Singapore SME loans are two good options to think about. But to determine whether business loan or equity investment is really better for your company, it is crucial to critically weigh in the pros and cons of both choices. Here is a list to consider both options:

Business Loan – Advantages

  1. Still the Boss – You will still have complete freedom to run the business in any way you see fit, with zero interference while having extra funds (from the loan). At the same time, you remain the one with the final say.
  2. No Profit Sharing – If your company thrives from effective use of the loan, all profits earned belongs to you alone without the need to share with other parties, and your only obligation is to repay your loan in full to the bank or financial instruction, plus interests.
  3. Better Financial Planning – As you have a repayment plan for the loan, you can plan how to use your funds more effectively while making your periodical payments; giving you greater freedom to manage your company funds.

Business Loan – Disadvantages

  1. Paying More – You will be definitely be paying interests that comes with the loan and the longer your repayment period, the more you are paying back and it can incur more losses if your business or project is not going well.
  2. Troublesome – Getting a business loan requires more than just a meeting with the bank’s representative but it also involves various documentations and at the same time, banks or financial institutions might need substantial time to consider approval; which can be cumbersome. There are no guarantees of approval either.
  3. Incomplete Loan – Even if your loan is approved, there is a chance you might not obtain the full amount but only a certain percentage of the amount applied for. In some cases, collaterals might be a necessity for approval and this certainly adds to the risks of higher losses should the business fails for any reason.

Equity Investment – Advantages

  1. More Funds – By looking out for equity investors, you might be able to obtain larger sums of capital if you are able to persuade them as banks and financial institutions are cautious in borrowing large amounts and they are certainly more skeptical in approving loans for new or growing businesses.
  2. Flexible Repayment – Applying business loan means you have to adhere to periodical payment periods, and failing to pay at certain periods may result in higher interests or penalties. With equity investors, repayment is more flexible and negotiable; such as the use of different forms of profit sharing as a method of repayment.
  3. Helpfulness – Getting experienced or well-connected equity investors can be really good in helping you run your company, as they might be able offer valuable advice. Moreover, they might be able to help establish better connections or expand your network, which ultimately serves to the interests of your business.

Equity Investment – Disadvantages

  1. Loss of Control – This is perhaps the greatest disadvantage of getting equity investors as they are part owners of your company; should they seek to gain control over the operations of your business, you risk losing complete control of your company operations.
  2. Profit Sharing – You have obligations to share monetary gains with them, as they are also your co-owners. This could mean taking away valuable funds that could be reinvested for other ventures or purposes beneficial to the growth and expansion of your company.
  3. Pulling Out – They reserve the rights to pull their investments if they lose confidence on the business for any reason and this could be highly detrimental to your company, particularly when certain projects are depending on their funds to run smoothly. In the end, you must determine which choice is better where you can maximize its perks while minimizing its risks. Every industry will have its unique situation. For example in biotechnology startups, the research and development phase can take decades to complete. While a business loan is good, it may not be the best choice to finance biotechnology startups. I have a friend who trying to develop a more effective HIV testing in Singapore opted for equity investment, as business loans were not suitable for his business. In making this decision, always consider the size of your business, the scale of the project and the amount of funds required and more importantly how it can ultimately serve to the best interests of your company.