Bank loans vs. venture capital

The first half of 2020 has been an extraordinary period for the startup and SME ecosystem. With the economy weakening as it is today, many people are thinking of defying the odds and launching their own businesses. Better take things into your own hands and be your own boss, right?

Well, with that decision comes a hefty set of bills to pay, such as employee’s salaries, rent, supplies, marketing and operational costs. Indeed, a joint sentiment report by INSEAD and MAGNiTT found that fundraising preoccupies more than half of responding founders (61%).

But where can entrepreneurs get their money from, when many of them might not be generating enough revenue to cover overheads or any expansion plans?

Local entrepreneurs have taken the Silicon Valley way of looking for funding through accelerators, angel investors and venture capitalists. Venture capitalists are more popular when it comes to start-ups and SMEs, because of their access to large amounts of money you are trading equity for funding.

With many choices out there, it can also be quite overwhelming to choose the right source of funding for you and your growing business.

Let’s talk about venture capital

To begin with, VCs are high risk with high rewards and they usually fund established start-ups that require a large round of funding which is usually over $ 50,000. They usually spread their money across several start-ups looking for the next Facebook or Google.

Business investors often come with personalised guidance because they have industry knowledge, business expertise and network of influential people that could benefit your company’s growth. And once you’ve got your foot in the door (so to speak), it’s easier to fund future investment rounds.

Before you go knocking on doors of VCs, you need to be aware that:

• Whenever you approach a VC for funding, the process of actually cashing in that cheque takes a long time. VCs are taking a huge risk with their money to fund you, which means they will need to really study your company, review yours books, audit your finances, evaluate your management and team and learn all the ins and outs of your industry to predict the future of their investment. After all of this, if they decide to invest, settling the terms and partnership agreement also goes through a lengthy process which can take anywhere from 6–18 months.
• Investors that put in large amounts of money become a part of an SME’s board of directors, which means they will have a say in every decision you make. The amount of money required for an investor to get on board varies from one company to another, but the principle is the same: the more money they invest the more equity they are entitled to.
• It’s normal for people to have different opinions and ideologies of running things, and we’ve seen many founders clash with their investors in the past. If you and your investors have any kind disagreement on operations, the business may also experience difficulties and the day-to-day will slow down momentum and traction until the problem is resolved or the business partnership is severed.
• Managing the business’s finances may be a very complex process in this case, because with investors now on board, every financial operation will be magnified and things such as hiring, expansion or taking your company public will need the approvals of every board member.

Let’s talk about bank loans

Bank loans are desirable for entrepreneurs and business owners because they get to retain full ownership of their company no matter how much the loan is. The business owner does not have to answer to investors and may steer the direction of the company in any way they prefer. This means they can change their business model or products and services thereby reflecting the need of tech ventures to adjust their value proposition.

Last but not least, all profits of the business will be distributed according to the CEO and other officers within the company. The bank that gives any business a loan has no say in such matters. The loan may be used in any way to help the business without seeking advice from any investors.

Here’s how bank loans can be a suitable option for your business:

1. They are the best choice when the economy is fluctuating and unemployment rates are at an all-time high; you don’t have to worry about your investors changing their mind at the last minute and interfering with your plans.
2. What is particularly great about business loans in the current climate is that interest rates are unbelievably low right now- as in, lower than they usually are. Not to mention the fact that banks do not interfere at all with how you run your business. This means that, the faster you pay your business loan back, the quicker you are off the hook!
3. Diversity. There are multiple loan choices that all banks promote to attract entrepreneurs. Alternatives like routine loans, regular small business loans and many others are offered for entrepreneurs. What you end up choosing will ultimately determine the fate of your business, so choose wisely and choose according to what you are capable of paying back.
4. With an efficient business plan, almost any enterprise can see immediate growth as long as they use the additional capital wisely. That means taking good care of your business operations, your hiring process, your marketing team and more.

Business loans and venture capitalists are some of the most common ways to fund businesses. Many business owners often debate over whether a loan or venture capital is the best method to fund their business, especially in these volatile times. If you’re an entrepreneur that prefers independence without having to rely on outside sources, a bank loan is the best option for you.

Thoughts, anyone? Share with us your comments below.