How to Decide Between Venture Capital or a Small Business Loan – Powderkeg
In what situations should I pursue either a small business loan or venture capital?
1. You Need Help Through Rough Times
I look at VC funding if I have solid plans for development and growth and I have projections available already that suggest that’s a profitable option. Generally, I don’t go for business loans unless the opposite is true. Business loans for me are about riding through the rough spots. For that reason, I tend to borrow much less money in loans than I might try to raise as capital.
2. You Aren’t in a Hurry to Grow
Taking venture capital is a slippery slope. You get cash quickly, but then your interests in possibly selling the company for a nice “personal win” need to disappear. If you want to retain ownership and grow slowly, take out a loan. If your goal is to build something huge, bring on the capital, expertise and network of a VC firm.
– Aaron Schwartz, Modify
3. You’re Expanding Rapidly
Venture capital is extremely helpful if you need to move fast, whether you’re developing a new product, scaling your company, or increasing the size of your staff. Venture capital can be a great for an influx of cash, but it often comes with clear expectations of where the company will go with the money. However, if you’re looking to bridge a small gap, loans can be a great way to stabilize cash flow.
– Manick Bhan, Rukkus
4. You Already Have Steady Revenue
Profits don’t come from growth; they come from efficiency. With that in mind, if you already have a revenue stream, why would you sell equity to a venture capitalist? You’re just giving away a share of your success. Venture capitalists are designed to help companies with major research and development needs — taking a gamble before revenues are in place. If revenues are solid, go for a loan.
5. You’ve Weighed Risk and Reward
As a three-time bootstrapped founder, I hate unnecessary risk. But I respect that some businesses can’t be profitable enough at every stage. There’s always a weighing of risk/reward with financing. Does the loan require a personal guarantee? How much equity and “breathing room” do the VC’s terms leave you? The answer falls entirely on the specifics, so read the fine print.
6. You Aren’t Planning to Grow Very Big
Small business loans are designed for those small business owners and freelancers who are not planning on growing very large but could use the capital to set up an office and cover expenses until they get some clients and revenue coming in. VC is really for those startups that are looking at a much bigger scale.
7. You Need $1 Million or More
If you have committed customers but you require cash to purchase materials to fulfill the orders, then go for a business loan. You know you are going to get your money back, and you know when. I see the loan as an instrument to give you some elasticity in short terms. For anything else, especially if the sum is the scale of $1 million and higher or longer time scale, I would look into VC firms.
8. You Want Someone to Guide You
This decision ultimately depends on if you want additional resources or not, and if you do need additional resources, make sure you are connecting with a venture capitalist that is able to provide this. You have the opportunity to get investors that have invested in similar industries, they know the struggles and can from there connect and help guide you. Business loans are more hands off.
9. You Expect to See a Large Return
It’s all the rage to get a VC firm to back you, when in most cases you just need capital to grow your business. Keep in mind that most VCs will want to see a 10 times return on their investment. So unless you have a business or startup that will see large returns, don’t even waste your time. We got a loan from American Express and a line of credit from the SBA to grow our business.
– Chris Brisson, KickaConference
10. You’re in a Hurry
Raising money from VCs can take months, sometimes years with strenuous efforts. Small business owners with poor or non-existent credit can have a very difficult time obtaining a loan from a bank, and may even have to give collateral in order to secure the business loan. With Kabbage, you’ll find out instantly if you’re approved. They offer flexible funding, and have fewer requirements than a bank.
11. You Want the Less Expensive Option
When cash flow is sufficient to cover loan payments and repayment in full is likely, a loan is going to be a much less expensive option. If you borrow $1 million, you may pay 10 percent per annum. With venture capital, you’re going to give up a minimum of 10 percent equity in your business. If you increase the value of your business tenfold, you’ve effectively given up $10 million in value to a VC.
12. You Want Full Control
The biggest factor would be the amount of control you want regarding how the money is used. A bank will let you spend the money basically as you wish, whereas a venture capitalist may have certain conditions. Plus, a VC will probably want or have a say in the growth and direction of your operation. If you want to be the sole influencer, choose a small business loan.