It doesn’t matter whether you are on the verge of starting a business or making attempts to expand it, the need for additional funds can’t be ignored. Many startups and other small businesses often have to choose between funding and fund raising to obtain the necessary capital. And well, the fact is that there’s no hard and fast rule or principle that can be applied to all situations.
The ideal strategy should be to take into account the amount of money that you require and pros and cons of funding & fund raising before you make a decision. When you are fully aware of the benefits and drawbacks of both of these methods, you will get sufficient clarity about the most suitable course of action for you. You must remember that the patch you choose will impact the shape of your business not only in the near future but also from a long-term perspective.
Here’s a detailed analysis of all the factors and parameters that matter in the overall scheme of things.
Opting for Business Working Loans
Getting a business loan allows you to get the necessary capital required for setting up your business or expanding it without losing even a small portion of the company. The primary features include.
- Easy repayment with fixed EMIs- Paying back the principal amount and interest can be done conveniently in Equated Monthly Installments. You will always be aware of the money that needs to be paid back every month.
- Make use of the government schemes- GOI and state governments have come with several scheme to promote businesses and manufacturing. Even banks and NBFCs have launched various loan products in order to boost businesses during the Covid-19 resultant lockdown. Hence, the process of getting loans has become relatively simple with less paperwork and newly defined eligibility criteria.
- Simplicity in relationships- Business loans are simple- you get funding and you pay it back. The lender will not play any role in the day to day activities of your business. They will not try to influence any of your business decisions.
- Loan approval isn’t easy- It must be noted that banks and NBFCs do no approve loan applications of startups for unsecured loans on the basis of an idea with great potential. In most cases, you might be required to put up collaterals which can be foreclosed if you default on payments. However, this is not always the case and lenders ask for collaterals only when the approved loan is high value. Lenders can also use this approach in case your personal credit history isn’t at par with the requirements of banks/ NBFCs
- Limited money comes your way- In case of business loans, the net worth of your business, assets held and other factors limit the loan amount approved by financial institutions. You need to assess whether the approved loan amount is sufficient for your present requirements.
When you opt for fund raising, you may get Personal Investors, Angel Investors, Venture Capitalists or even Peer-to-Peer lending. In most cases, you will have to provide them with equity i.e. ownership rights in your business. The most prominent aspects you need to consider in this scenario are:
- Reduced decision-making ability- Investors are given equity in your business and they tend to influence major & minor business decisions. As a result, you might end up losing the freedom to make plans and execute them as per your desire. At times, their guidance might even prove beneficial but your control is diluted.
- Discretion of investors- Whether or not they want to invest money in your business is entirely up to them. They will assess all aspects of your company based on their benchmarks. Hence, meeting of the minds and having a shared vision is essential for a long-term and mutually beneficial relationship
- Mutual understanding and common goals- In case you are able to establish a relationship of trust, investors can invest substantial sums of money in your business. It must be reiterated that the amount of money they put up and the terms of investment depend not only on negotiations but also the extent to which your ideas impress the potential investors.
- Dilution is a possibility- Investors might pull back their investment at their discretion, if things don’t work out as per their expectations. So, keeping investors satisfied becomes hugely crucial. They also have the option of selling or diluting their equity which can lead to complex problems for you including complete loss of control if they hold a substantial percentage of shares.
- Sharing of profits and dividends- All investors come on board in order to make money from your business. In case, you want to sell your company, you’ll have to pay investors based on the percentage of equity held by them. Also, in case of dividends a portion of profits will also go to them.
Now, after due analysis of all the significant factors, we can easily say that both funding and fund raising have their own sets of benefits and shortcomings. However, startups and other businesses need to take a call keeping in view the parameters listed above. At the same time, they need to figure out which approach will benefit them the most.
Your business objectives, vision and the requirements must be given their due importance if you want yourdecision to be the most profitable one for you company.
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