Most businesses are no stranger to dips in revenue. In fact, according to a recent study by US Bank, over 80% of businesses today fail because of problems with cash flow. Finances tend to fluctuate between busy seasons and slow periods. To alleviate some of this financial stress, many businesses take advantage of business capital sources. Two common funding sources are venture funding and business loans. But which choice is right for your business?
Differences Between Venture Funds and a Business Loan
Below you'll learn the difference between venture funds vs. a business loan as well as the pros and cons of both.
Venture Funds
Venture funds are a type of investment fund that invests in both businesses just getting started but offer high return potential and existing businesses that require additional capital injection. The funds are managed by venture capital firms and these investors are typically high-net worth individuals or institutions.
Venture capital can be an ideal choice for many businesses. It's generally designed for businesses with not much brand presence yet and an unpredictable cash flow. Basically, it's often used by newer businesses that are currently in the opportunity stage and don't have a good track record yet.
Pros of Venture Funds
Some advantages of venture capital are:
You get to keep the money. Investors are basically gambling on your business — they stand to gain if your business is a success, but if it fails, they have to eat their losses. However, whether your business is a success or if it fails, you are not obligated to repay venture funds, unlike with a business loan. If you do fail, you won't be sitting under investor debt.
Venture capital might be the only reasonable course for entrepreneurs requiring a bigger round of funding.
Venture funds could help grow your company quickly.
Investors often have extensive networks and vast business experience. Therefore, they can mentor you in the art of business growth.
Cons of Venture Funds
Some disadvantages of venture capital are:
Raising funds could be a difficult process.
Investors own a stake in your business.
Business Loan
When it comes to business loans, you'll need predictable cash flow and a strong presence. You'll need more credibility to grow your business and confidence that you'll be able to pay the loan back without any issues.
Pros of a Business Loan
Some advantages of a business loan are:
Business loans allow you to retain full company ownership as long as you pay the loan off.
All business profits are distributed according to company officers, like the Chief Executive Officers. You can use the loan in any way you see fit to help your business without having to seek advice from investors.
You don't have to share profits with investors.
You'll be more motivated to promote your business if you've paid the loan off.
Cons of a Business Loan
Some disadvantages of a business loan are:
If you're a new business owner, you might not be able to produce revenue if your business doesn't perform. So, you could have trouble paying the loan on time and this can threaten the existence of your business.
Interest accrues on the amount of money you borrow and you could be looking at high rates.
Business loans typically require some type of collateral to secure the loan. If your business fails, you're still responsible for the loan.
Business loans are difficult to obtain for business owners with non-existent or poor credit.
As a business owner, you'll need to decide whether venture capital or a business loan makes better sense for you and your needs. Whether you're an existing business or a start-up, The Bahamas Entrepreneurial Venture Fund makes equity or loan funding available to you.