A client recently had an opportunity to get an incredible loan that would have helped him dramatically build his business. The company had positive cash flow, up-to-date financials, and plenty of collateral. In our eyes, taking the loan was a no-brainer--but he had a problem. Early on, his business took on an investor in exchange for 25 percent equity in the company. The investor wouldn't personally guarantee the loan, so the business was stuck.
Most business owners don't think about how funding could negatively influence their chances of receiving financing down the road because they're so excited to have successfully pitched an investor. However, it's essential to understand the relationship between investor and business owner, and all of the financial implications of bringing on an investor.
Don't Limit Your Future
It's vastly important to have a discussion about financing with your potential investors early on in the relationship-building process. If an investor owns 20 percent or more of your company and you want to get a loan in the future, the investor must be willing to personally guarantee the loan. This means that your investor will be also likely need to put up personal and business assets as collateral. If your investor isn't willing to do this, you could be limiting your future financing options and putting handcuffs on yourself and your business.
Just like the relationship with a potential business partner, entering into a relationship with an investor is like a marriage of sorts. You'll no longer be financially independent, you have to be considerate of your investor's time and resources, and the decisions you need to make are not yours alone.
So before taking on an investor, make sure that you both are on the same page about what will happen should the business need financing. If your investor wouldn’t be willing to personally guarantee the loan with you, it may be time to consider another investor or another option than equity financing.