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Despite what you see on Shark Tank, money from private investors is not the only way to fund growth for your small business. Many entrepreneurs opt instead to finance a new project or product line with debt in the form of a bank loan or line of credit. And still others eschew all outside money and choose to operate their business out of cash flow, avoiding the challenges of working with an outside investor or incurring the interest costs of debt financing.
Figuring out which of these strategies is the best way to fund your company's growth involves a quick inventory of priorities, say small-business experts. This means understanding what's most important to you, how comfortable you are with sharing decision-making, and how quickly you want your company to grow. Consider also that each of these funding methods has its own advantages and drawbacks. Here are some of the pros and cons of each, and some of the questions you should be asking to make the best decision for your company.
Self-funding your company's growth means you're not going to incur the financing costs that come with borrowing, nor will you have to share decision-making with outside investors. You also eliminate the need to come up with an exit strategy or liquidity event (like an IPO), since you don't have to figure out how an equity investor will get his or her money back. You control the direction of the firm and get to make all the financial and managerial decisions.
The downside of this strategy is the pace of growth. "Any business that grows only organically, by reinvesting profits, will grow more slowly than one that uses debt," says David Worrell, a partner at Fuse Financial Partners and the author of The Entrepreneur's Guide to Financial Statements. "But it may also survive tough times better than a company that has large debts." Another thing to consider: Without ample funding, there is the risk that you'll have to turn down a big customer order or other growth opportunity. "A business that is debt-free will always be smaller and always have trouble finding funding for other opportunities--even highly profitable ones," Worrell adds.
An early-stage or angel investor can help catapult a business into growth mode quite quickly. Unlike with bank borrowing, you'll get your money now but won't have to pay it back until much further down the road, through an IPO or some other liquidity event. Outside investors can also bring with them expertise you might not have in-house, and they may have industry connections that can open doors for you and your company. Further, if the investor has already built a business, you have a sounding board for new ideas and strategies.
But just as in marriage, personal chemistry and a shared vision of the future are essential to the success of having outside investors. "Too often, some of these smaller investors don't have the experience you need or they're more worried about the safety of their investment than about what's best for the business," explains Charles Green, managing director of the Small Business Finance Institute, an Atlanta-based nonprofit that provides financial education to entrepreneurs. In exchange for their money, these investors are going to want a say in how the business is run and the direction it takes. If the thought of answering to an outsider or having a little less control over your company doesn't sit well with you, an equity investor may not be the way to go.
There are more borrowing options for small-business owners today than ever before. In addition to friends and family, there are local banks and a growing number of online funding sites popping up every day. Some of these can process a loan request in a matter of days (versus weeks for most banks), meaning the money is in your account and available for use. Borrowed capital does not require you to cede control to an outsider, and the money can be used however you deem best for the business.
But borrowed money comes at a cost. Lenders--both banks and online sites--obviously charge interest and other fees to process applications. Some of the online sites, says Green, are less than transparent about the total cost of borrowing, so business owners really need to dig through the terms to make sure they're not paying an exorbitant interest rate. "Using debt is really an emotional issue and not a financial one," says Worrell. "There are business owners who will never want to be beholden to a bank, because they can't stomach the risk."
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