Startup Financing: Venture Capital or Business Loans

Launching a startup business is never an easy task. Aside from having a great idea, a business owner needs to do proper research to identify their target audience and understand their competition. Later they must realize their idea and create a business that will stand out in the crowd and achieve success. However, with all the challenges and difficulties startup owners have to face there is always that one obstacle that really gives you trouble. In most cases, that obstacle is proper financing and securing enough funds to grow your business well.

Startup owners are faced with a question about whether to seek venture capital investments or to try and secure a loan from a bank. It’s is a difficult question and an important decision, but the answer to it rests on what do you want from your business and how do you intend to get there. Let’s have a look at the both options and hopefully help you make your choice easier.

Difference between venture capital and a loan

Venture capital means securing funds for your startup business from an investor. That means that if an investor likes your business idea and its odds of surviving on the market, they will support you financially and by giving you valuable advice to help grow your startup. However, you don’t have to pay back the investors but they get a share of your business equity and are involved in future decision-making.

On the other hand, a business loan is instant cash given to you by a bank, which you can use to develop your business or create a product. But, the amount of money you get from a bank has to be paid back with interest over an agreed period of time and you need to have a good credit score unless you want to face a high-interest rate. This cash leak may hurt your business if it’s not doing too well and if you don’t have a stable revenue, but you don’t share business equity with anyone.

When to seek venture capital?

Venture capital is best sought after when your startup is in its early stages of development. That means before you actually launch your business and before you have a developed product, as well as a cash flow. Venture capital can secure enough means to properly develop your product or service and to successfully launch your business.

However, in order to impress venture capitalist, your startup needs the potential to become a multimillion company and your idea needs a proof of concept before you can even present it to the investors. To clarify, investors will only support you if your idea looks promising for greater ROI. That means that if people look forward to your product or service and that it won’t run short on demand for years to come, then you have a good chance of securing venture capital funds. As a result, your company will prosper and you will share profits with your investors, as well as make future business decisions together.

When to seek a loan?

Seeking a loan is best if you’ve already developed your business to a point where you have a working product or service and a steady cash flow. That means that you’ve already launched your startup on the market and that you have customers lining up. By taking a loan, you can use those funds to position yourself better on the market, expand your business or secure funds for an investment that will undoubtedly turn a large profit.

However, banks can be very strict when giving out loans and interest rates may hurt you in the long run. Nevertheless, you may be able to secure a good loan from a bank if your business is doing well, or you can turn to companies that offer small business loans at better terms than banks. Still, you’ll have to pay that money back along with the interest fee, but if you invest your loan wisely you’ll be able to turn a profit. That way, paying back the debt won’t leave a huge dent in your budget or revenue.

Both venture capital funds and loans are a good way of securing resources for your startup. However, which method you’ll choose depends on your business goals and future plans. Venture capital means you’ll be sharing your company with investors, while loans mean you’ll still be your own boss but you’ll have to pay it back. Just make sure you know what’s best for your business and for yourself before you make an important decision.

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Andre Bourque (SocialMarketingFella) is Editor Emeritus of Technorati.

He covers emerging trends and news in social, mobile, cloud, and related technologies.

Based in San Francisco, he can be contacted via his social channels and at: andrefbourque@gmail.com

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