Capital Equity or Loans? : Thats the Question

By: Devora Witts

When your business is in need of money, there are many things you need to take into account before choosing the source of finance. What is the amount of money your company needs? What will the money be used for? Will your company be able to meet the requirements of lenders? Is the current company situation attractive for investors?

The Amount Of Money And Its Uses

Determining the amount of money you are looking for is essential. This question is highly related to the use the money will have, but needs to be answered separately. You may need finance for many things: Buying equipment, hiring new staff, repaying debt, buying supplies for production, etc. The overall sum is the amount we are interested in, since if the amount is high enough, capital equity becomes an option. Otherwise you will be able stay on your own and resort to banks or private lenders as long as your company's credit is good or you can provide collateral.

Meeting Loan Requirements

Contrary to popular belief, business loans are meant only for running businesses. Usually lenders require the company to have a three years credit history before even considering lending money in the form of a business loan or line of credit. If your business can not meet this requirement you may need to request a personal loan. Given that the loan amount will probably be considerable, you may need to provide some kind of collateral.

Investor's Requirements

Investors are into high risk financial operations but are not kamikazes. The company needs to show a rather foreseeable future with high returns in order to compensate for the risk before providing capital equity to your company. Nevertheless, investors are patient by nature and you will not have to repay the money as you would have to do with a lender. At least not in the near future since investors seek high returns over long term investments.

Capital Equity Or Loans

If the amount of money you need is not that high, you will probably prefer to resort to banks or private lenders in order to borrow the money and repay it in inexpensive monthly payments. Reasonable rates can be obtained with business loans and personal secured loans.

If you need more money, you may want to consider to group together with some investors. They will provide capital equity in exchange for shares of your company. You will then become business partners sharing the profit and the losses in the same percentages as the shares each one holds. Opening your company to investors is something you will have to do sometime in order to keep growing. The key is to know how and when to do it in order to retain control over the company's decisions.

As you can see there is no single answer to the question asked at the beginning of this article. The decision is up to you, but make sure you ponder every single possibility with its benefits and drawbacks before making your choice. A decision of this nature will determine your company's future for many years to come.

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