Bank Loans and Invested Capital
Sunday, 13 October 2013 19:47
If you've found yourself with a small business on the rise, congratulations. In a turbulent economy, it's often difficult to find the courage to get a business off the ground and expensive to keep things flowing. No matter your capital source upon commencement, most businesses need more money than they make to keep operations in motion, especially at first.
There are two major ways to secure capital to fund business needs: bank loans and invested capital. For private companies or those too small to trade publicly, private equity investments make for a convenient possibility. However, what works for one company may not work for another.
Private equity investments are alluring to business owners for several reasons. For example, invested capital by any party is non-refundable unless specifically stated otherwise. If a business venture fails, the investor loses and the business owner is not liable. Additionally, terms can be freely negotiated with an investor to reach a solution that appeases both parties, something often lacking in loan financing.
However, when investors put their own capital on the line, they become partial owners.Allowing an individual or fund to buy ownership rights in exchange for capital can be risky, especially if an investor's views differ greatly from yours. Furthermore, coming to terms with an investor over capital amounts, terms, and other details can be an incredibly lengthy process, making the outcome uncertain until a deal has been signed.
Bank loans, on the other hand, act as a way of securing capital without the need to appease an investor or negotiate terms. While an investor may take weeks to ponder an opportunity, a bank's underwriting team general turns around decisions in a matter of days, making for an alluring prospect for those who need reliable capital on a specific time line. Additionally, borrowed capital does not make the lender a partial owner, allowing an owner to retain autonomy over his or her venture.
Banks do, however, like to be repaid, and usually at a cost. With good credit and a reliable history, a bank may be willing to offer excellent terms but at some point, it will want its money back, even if your venture fails miserably. Additionally, an underwriter establishes terms and limits that are largely non-negotiable, mostly for liability's sake. While a private investor may be okay with the risk an investment brings, banks generally are not.
For most business owners, the question of speed, reliability, and ownership make bank loans a preferred option. With profitability comes financial freedom, allowing a company to pay back debts and operate alone. Investors generally want to see a high return while banks are satisfied receiving their principle, plus interest income. For most small business owners, bank loans are the right choice. Even with a forced repayment, the low amount of risk is worth the payoff.
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