Investors provide funding in return for shares in the business and a return on investment through exit (usually a business sale or listing) within a relatively short period – commonly 3-5 years.
Advantages: It may be suitable when the investment is seen as too risky by banks or where cash flow cannot cover loan interest repayments. Investors can bring key skills, contacts and access to new markets.
Disadvantages: You will surrender a degree of power in decision-making and equity investors will often seek higher returns than banks.
Lenders provide capital in return for repayment with interest through products such as a term loan or invoice discounting facility.
Advantages: Monies are generally available for the term and interest fixed throughout, so you can budget appropriately. Repayment ‘holidays’ and overpayments can be negotiated.
Disadvantages: Loans typically contain financial and other targets and are often secured against business or personal assets (even your home).
Identify investors you feel are suited to your business and prepare a thoroughly researched business plan and realistic valuation. Getting the right legal and financial experts on board early is vital for the success of the business and its shareholders.
To download the full article, as published in the September/October issue of Business Leader(South West) magazine, please click here.