Loans and Investors: What You Need to Know

What Is a Loan?

Any loan, whether personal or for your business, works basically the same way. Someone gives you money, and you agree to pay it back within a certain amount of time. There is usually an agreed upon interest rate and payment schedule. The terms of the loan are set in writing in a document called a promissory note. A loan can be from an individual like a friend or family member, a lending institution like a bank or credit union, or even the government. Generally, business loans must be for a fairly specific purpose such as to open a new branch of a store, to hire additional employees or to purchase new equipment for your business. If you have strong credit and a solid business plan, you may be a good candidate to obtain a loan for your business.

How Loans Can Help Your Business

If your business has a dependable amount of cash flow that allows you to make regular payments, then taking out a loan may be a good option for you. A loan allows you to retain full control over your business operations because your only obligation to the lender is to pay them back and nothing else. Plus, any interest you pay on the loan may be a deductible business expense.

Drawbacks of Taking Out a Loan

Business owners who don’t borrow sensibly may find themselves in over their heads. There is a fine line between borrowing enough money to help grow your business and taking on so much debt that it becomes difficult for you to pay the loan back. Some lenders may require you to secure the loan through either collateral or a personal guaranty. That means if you default on the loan, your personal assets may be at risk.

What Is an Investor?

An investor is someone who commits money to your business with the expectation that they will receive a financial return at some point in the future. That return may be a specific monetary amount or may be in the form of a share of the company or its profits. In order to secure funding from an investor, you will have to convince them that your business or idea has a lot of potential to make money, and you will have to sell them on it with a strong pitch.

Where to Find an Investor

If you don’t personally know anyone who could potentially invest in your business, you will need to do some research in order to find investors. Networking locally through your lawyer, accountant or business association can be a good place to start. There are also numerous websites that match small businesses with potential investors. If you are unable to find a single investor willing to put a lot into your business, you may be better off getting smaller amounts from multiple investors.

Advantages and Pitfalls of Using an Investor

Starting or growing a business can be a lot to take on, and having funding from an investor can take some of the financial pressure off and let you focus on your other responsibilities. Plus, investor funding has a clear tax advantage over a business loan. However, securing funding through an investor may not always be simple. You will likely have to put a lot of hard work into getting someone to believe in your business and your abilities. Investors will want to see facts, figures and projections before handing money over to you. If you accept an equity investment in your company, you must be willing to cede a certain amount of control over how you run your business. But given that many investors are former business owners themselves, they may actually be able to give you meaningful insight and helpful advice based on their own experiences.

There are very few successful businesses today that didn’t get financial help from somewhere along the away. Expanding your business may seem like a daunting task, but loans and investors can be a great way to obtain funding as long as you do your homework first.