If you are a business owner and planning to raise funding for your business then you have two major options in front of you, one is opting for a business loan either from a Bank or an NBFC and the second option is approaching private investors for the funds. These two options are quite different from each other though it provides you money for the same cause. The decision is totally yours that with whom you would prefer to go but your decision will not be 100% accurate and correct if you are unaware of the difference between the two. Let us know well these two borrowing options well through this article.
Business Loans VS Private Investors
Pros and Cons of Private Investors
- If you are new to a business or just in your initial stage a private investor may be more helpful to you, the reason behind this is, a private investor doesn’t need as much eligibility criteria to be eligible for that loan as that of a business loan from a bank.
- A private investor doesn’t need any collateral or security against their lending for your business but when you go for a business loan they will surely need collateral as well as a guarantor against the loan.
- Banks are not easily ready to believe in your business plan or idea and hence not ready to lend you easily but a private investor is more understanding and they are ready to thing as you for your business.
- In short-term, raising money through private investors can be far more affordable than taking out a business loan from a bank.
- The deal with your lending from an investor can be structured so that the investor starts getting a share of your profit from your business once your business starts getting profit.
- Most importantly private investors generally can’t take you to the court as easily as a bank can do for not repaying the borrowed money.
- Many of the benefits of private investors can be turned into their cons. For example, as the private investors don’t need any collateral or verifiable financial history, a borrower is in a weak state to bargain. In this case, the investors can ask for and even they often get a large equity share in the borrowers business. This way you give a major part of your business or you can say equity in your business to someone who is not at all participating in it apart of giving the money.
- Additionally, there are some legal considerations about raising money from a private investor, those are- You’ll need a lawyer to help you prepare the documents and advice you accordingly for the same. In case, if something went incorrect whit these legal documents you can be in a mess.
Pros and Cons of a Business loan
- Banks are fairly standardized, and hence business loans can’t be varied as that of a borrowing money from a private investor. As such you cannot bargain much with a bank or an NBFC as you can with a private investor for your business loan.
- When you borrow money from a bank for your business you don’t need to give any equity in your business. There is even no profit sharing. You just need to pay interest on your borrowing nothing else. The interest charged is also fair enough.
- When you borrow from a private investor they may drain your time and money too by constantly asking for updates in the business as they are also equity holders and a profit to a business is their profit too. With a business loan, there is no such problem as long as you make your payments towards it.
- More importantly, you are don’t need to do any profit sharing, the entire profit is all yours. But when you take from a private investor you have to do profit share accordingly as per the contract which you mutually signed.
- In the initial stage it’s difficult with most of the business owners to get huge funding that too from a business loan. This is because most of the lenders think that lending a large amount money in the initial stage of a business is quite a risky stuff. In the case, if a lender is ready to lend you money it will be at higher interest rates or smaller amounts.
- Loans tend to carry more downside risk than borrowing from a private investor. With a business loan, you need to put up collateral. And putting collateral against your loan is also risky and here your collateral is at risk which the bank can take if you fail to pay the borrowed amount (loan). With a business loan, you’re also required to sign a personal guarantee on the loan, they come after your personal assets.
To Sum It Up!
Now you know the pros and cons of borrowing from both a bank as a business loan or from a private investor. Analyze your requirements and choose wisely the best suited option between these two.