Small businesses rarely thrive without outer funding and financial help from investors. The first thing a business owner does after developing a business plan is going to the bank. Getting a small business loan is not a challenge if the borrower has excellent credit history and high credit score.
The question is – what is the alternative (if any) to a bank loan, which could bring a business owner more freedom, commercial benefits, and flexibility in payments? What source of funding the most experienced business owners prefer?
If you are a business owner too, we bet you think on ways to get investments or a loan regularly as each Company needs constant commercial support, especially at the stage when the level of profit doesn’t cover expenses yet.
Let’s consider venture capital as an alternative for small business’s debt funding, so we will find out whether venture capital is worthy to attract.
What is Venture capital?
Venture capital is money given by investors who firmly believe a certain business entity or a startup has a potential to grow and gain commercial success. Investors evaluate the company’s potential performance and estimate all possible risks and losses and they take decision realizing consequences fully. That is the biggest difference of a Venture capital from a bank loan.
In a case that particular business will fail to succeed, investors who put venture capital in a startup lose money just like the business owner himself. Still, investors are willing to take risks due to potential returns that exceed bank deposit rates and the majority of other types of investments.
Bank lenders, on the other hand, do not take such risks as they have a protection of their money in a form of collateral.
Venture capital is the most common way to fund small businesses, but it has some controversial aspects business owners should be aware of.
What are the benefits of Venture capital as an alternative to a bank loan?
- No need to give collateral in exchange for funds.
Venture capital is granted by independent investors (private individuals) who invest money on their own risk, so the funds they put in a startup are unprotected. For the business owner, it is a good thing as he doesn’t risk his assets and collateral in a case his business will go bust.
- No need to make monthly payments.
Investors do not make monthly payments in exchange for their funds, while they prefer to get a share of future revenue that they estimate to be high. A business owner doesn’t literally pay for using Venture Capital while he does share a part of future profit with the investors who believed in his business with their money.
- An opportunity to involve way larger amount of money than a bank could grant under the same conditions.
This is the biggest advantage for a business (especially for small business). As you may know, a bank can grant a loan according to a business plan and a value of assets that could be given as collateral. Bank will not give the large amount as unsecured loan, so the business owner will receive the loan that is almost equal to the market value of collateral. Often startup founders do not have enough valuable assets to receive the needed amount and Venture Capital comes to the rescue.
What are the cons of Venture capital?
- It’s a really long process.
When it comes to getting a bank loan for small business, the whole process may take about 2-3 weeks. Attracting Venture Capital is a way longer process as it requires a thorough work with investors who you need to convince to put their money into a newly appeared company. In average it takes up to a year or two to find and attract Venture Capital under the terms both parties find beneficial. Therefore, if your business needs an urgent investment, Venture Capital is not the option.
- Investors have a right to intrude into Company’s decisions
This is the part that makes lots of business owners refuse using Venture Capital, because they don’t like the fact investors have a full right to vote for certain decisions or to say the owner what they like and what they don’t. That can be seriously frustrating for business owners when they feel their Company does not entirely belong to them anymore.
- Business owner has to give up a certain share of the Company
In fact, by agreeing to involve Venture Capital, a business owner “sells” a part of the ownership of his Company in exchange of new financial inflow. Depending on the terms the Venture Capital was given, after the certain period of time when the revenue is paid off to investors, the total initial ownership can be restored.
Venture Capital can be a great alternative to a conventional bank loan if a business owner is ready to give away a part of his ownership and the right to make decisions to investors. Besides, attracting Venture Capital is a long process, so you can opt for it only if you project is on hold and doesn’t require urgent financing.