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Venture Capital or Bank Loan: Which to Choose?

May 22 2012

Loan

Loan (Photo credit: Philip Taylor PT)

There are several categories of loans small business owners can pursue while trying to fund their start-up company. Before choosing which type of loan to capitalize on, you should know the advantages and disadvantages of the two most common categories of business loans.

Venture Capital Funding

Venture capital firms provide funding to start-up companies in exchange for some amount of stake in the company’s equity. Essentially, the venture capitalist is trading immediate funding for partial ownership in your growing start-up company.

Advantages

Venture capital start-up funding is different from traditional loans in that you gain personal access to those providing the funds. In some circumstances, expert venture capitalists are available for advice and guidance while you are building your small business. Secondly, venture capitalists often have much more lenient lending criteria than other loan avenues and because repayment comes in the form of equity and returns, your business’s credit cannot be negatively impacted.

Disadvantages

The disadvantages of opting to pursue venture capital funding for your business deal primarily with how much control you have within your own company. Once you sell off a percentage of equity in your business, the purchaser then has a say in vital decision making. Before choosing venture capital funding, make sure your existing business partners are on board with including a new member in the team.

Bank Loans

Another loan option is to seek approval on loan from a bank or other corporate financial institution. Banks offer a wide variety of loan options which all come with similar advantages and disadvantages.

Advantages

The immediate benefit of choosing a bank loan to finance your start-up company is the ability to retain all ownership equity in your business. As long as payments are made on time, a bank will never actually own your business. Another advantage of bank loans is that timely payments help to improve your business’s credit rating.

Disadvantages

The disadvantages of bank loans are getting approval and maintaining repayment. Brand new businesses often find it difficult to get approved due to their lack of credit and profit history. Most banks who loan to start-up companies and small businesses have strict standards of credit worthiness and provable profits. Also, it is important to maintain repayment of bank loans once your business receives the funds. Failure to make scheduled payments will hurt your company’s credit rating and can lead to serious financial repercussions.

An understanding of the advantages and disadvantages of different business loan options can help you choose the right financing option for your growing company.

Danny enjoys writing about small business funding.  He currently works for a company that provides accounts receivable factoring for small businesses.

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