Startup Financing: Venture Capital vs. Business Loans

Businesses fail all the time… The saying’s a cliché at this point, but nonetheless, it’s the truth. The economy is getting better, of course, but it seems a lot of businesses still have a problem staying afloat in today’s day and age…

And why do so many business fail you may be asking…

Well, according to a recent US Bank study, more than 80% of todays’ businesses fail because of cash flow problems. And you have to keep in mind that cash flow doesn’t just meant the amounts of money that are coming in and out – you also have to take timing into account.

But that’s not the only financial problem young entrepreneurs are facing these days…

Trouble Obtaining Enough Financing

This is definitely a big problem for a lot of businessmen out there. According to a recent NSBA survey, roughly 27% of businesses claim that they weren’t able to receive the funding they needed to expand their business operations and even get their business off the ground in the past.

For those 1-in-4 startups, the lack of funding usually prevented them from growing their business – especially for female- and minority-owned businesses, but that’s a story for another day. It also left some of them unable to finance manufacturing and forced them to lay off some of their employees.

How Much Startup Capital an Average Business Needs?

So we’ve discovered that companies often fail to gather enough money to get started – but the question now is – how much money does an average small business need? Well, answer to this depends on who you ask… There are in fact two different surveys with very different answers to this.

On one side, we have the Wells Fargo Small Business Index, which suggests that the average amount of money startup needs is only around $10.000. On the other hand, a recent Kauffman Firm Survey suggests that the figure is much larger – eight times larger, to be exact.

So What Are Your Options?

Now, when it comes to financing, venture capital usually gets all the attention, seeing how it’s the most popular way of financing a business, by far. For modern entrepreneurs, debt funding – or business loans – sounds rather old-fashioned, and even out-of-date, at best…

At worst, people view it as the last resort for those who can’t raise venture capital on their own. In reality, business loans don’t deserve the rep they have and both types of capital have their own advantages and disadvantages,

The choice largely depends on your company’s maturity, cash position and of course, your business goals. So let’s take a look at both VC and BL in order to help you see which one will suit your company the best…

●      Venture Capital

If you’re running an expanding, scalable company, venture capital should be a good option for you, because this way of financing is definitely not meant for your local mom-and-pop shops out there. In order to become a candidate for VC, your aim needs to be to build a multi-million enterprise one day.

So let’s assume that that’s your aim, here is when VC works:

  • If you’re cash-flow is either weak, unpredictable or even nonexistent.
  • If you still don’t have any strong brand recognition or you don’t have a great track record.

To make a long story short – venture capital works best when your company is still young and immature. The reason behind this is pretty obvious – if you don’t have any meaning revenue and your company still in its first stages, paying back your loan is going to be pretty damn hard.

So if you’re not absolutely certain that you can pay off your loan without ruining your business in the process, it doesn’t really make any sense to add debt to the list of your problems.

●      Business Loans

On the other side of the coin, you have business loans, and here are a couple of things you need to have if you’re interested in raising debt to fund your business:

  • You need to have a strong and more importantly, predictable cash flow.
  • You need to have enough credibility to grow your business and no interest in giving more equity

In short, if credibility isn’t an issue, and you have a good cash flow and you have to have confidence that you can pay back the loan without any complications or anxiety. This way you’ll be able to keep your equity in hand for a bigger opportunity in the future as well.

There are lots of options for you today, and since the economy is in much better shape than just a couple of years ago, companies have much better chances of getting large small business loans than before.

Final Thoughts: What’s the Better Option?

Of course, the answer to our final question on the evening depends on a number of different factors – on the industry you’re in, the opportunities you’re perusing, so on and so forth. Basically, Venture Capital money and bank money server entirely different purposes and carry different risks.

If you go for VC investors, you have to be aware that they take a lot of time and they are usually very picky about the businesses they choose to invest in. however, if you know what amount of money you want and you don’t mind spending a lot of time pitching your ideas, than you should go for it.

A business loan, in contrast, is often secured against collateral. This means the risk is completely on you if your business falls through. But speaking in strictly financial terms, a business loan has all the advantages, as it’s far lower cost of capital.

And if your company is at the VC stage, you probably can’t get straight debt financing. Nonetheless, whatever your choice may be, you have to make sure to take enough time to assess your situation and see what works best for your organization.

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Nate Vickeryhttps://bizzmarkblog.com/
NATE Vickery is a business technology expert mostly focused on future trends applicable to SMB and startup marketing and management processes. He has also been blogging in the past few years about before mentioned topics on various leading sites and communities. In the little free time left, Nate edits a business oriented website - Bizzmarkblog.com
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