It’s not unusual for a business’s financial situation to fluctuate from season to season. Having a financial backup plan is important if you want to keep your cash flow steady during difficult periods. There are a few ways to accomplish that goal. Two of the most common are venture capital and business loans. Understanding how each one works is essential. It’s important to learn as much as you can before making a decision.
What Is Venture Capital?
Venture capital is more ideal for a newly-formed business that may be unsure of how its cash flow will actually flow through the business. Venture capital is often provided by investors who are looking for long-term, substantial growth that they can reap some type of reward from in the future. In most cases, the investor may not expect any type of ROI on their investment for three to five years. Once the business is solidly established, an investor may expect to receive a percentage of the yearly earnings.
Advantages and Disadvantages of Venture Capital
You don’t have to be established to receive venture capital. In fact, in addition to the capital you receive, you will also gain a mentor in the investor. Basically, you receive the funding you need without going into heavy debt and you also gain the advice and guidance you need from an experienced business professional.
One of the drawbacks of venture capital is that investors may be very selective and require a much higher business valuation than other lenders. Another drawback is that some venture capitalists will request up to 50% ownership of the business if it is a startup. This may mean that it will get harder to buy them out if you no longer need to work with them.
How Do Business Loans Work?
Business loans work by providing your company the money it needs in return for holding its assets as collateral. They are better for businesses that are already well-established. The money you receive can be used for a variety of things ranging from payroll to inventory. It’s also much easier to pay off in the long run. You don’t have to worry about paying off a major debt to an investor.
Advantages and Disadvantages of Obtaining a Business Loan
With business loans, you have multiple options to choose from to ensure you get the right loan for your business. They also offer a level of flexibility that is unheard of when it comes to venture capital. A small business loan also allows you to retain full ownership as long as you pay the loan off.
Drawbacks of a business loan include passing a credit check and scrutiny of your business’ track record. For some these may not be a problem, but it’s important to know they are part of the application process.
If you need business funding, take a minute to learn as much as you can before you fill out an application. The right type of funding will make a huge difference in the success of your business and how you manage it in the future.