Get a Business Loan or Bring In an Investor?

The core difference: debt versus equity

Debt is borrowed and repaid on a schedule. Equity is exchanged for ownership and has no scheduled repayment.

With a loan, the lender has no say in how you run the company as long as you pay as agreed. The cost is interest or fees, and it ends when the balance is repaid. With an investor, you may owe nothing monthly, but you now share future profits, a sale price and often decisions.

See capital, equity and debt for the basics.

What each route costs

A loan costs a known amount of money. An investor costs a share of everything the business becomes, which can be far larger if the company grows.

Illustrative example: you need $100,000. A loan might cost $20,000 in total, then it is done. An investor taking 20 percent of the company for $100,000 costs nothing monthly. If the business later sells for $2 million, that 20 percent equals $400,000. The cheaper source depends on how successful you become.

For slow-growing, profitable small businesses, debt is often cheaper. For high-risk ventures that cannot afford payments yet, equity may be the only option.

Control, expectations and exit

Investors usually want a say, regular updates and an eventual exit such as a sale. Lenders want repayment and some reporting, not ownership.

Before accepting equity, ask what the investor expects over five years. Some are patient partners. Others need a sale or a fast scale-up. Misaligned expectations are a common source of conflict.

• Loan: you stay the decision-maker, but you must make payments in good and bad months.
• Investor: payments are flexible, but you answer to a new stakeholder.

If you want to explore the equity path, read how to find investors for a small business.

Which businesses fit which route

Businesses with steady sales and a clear payback fit loans. Businesses with large upside, no near-term profits and a need to scale quickly fit investors.

A restaurant, contractor, clinic or retailer with several months of revenue history usually looks like a loan candidate. A technology startup building a product before revenue usually looks like an equity candidate. Many established businesses use loans first and equity only for a major expansion.

Lenders also favor documented history: bank statements, tax returns and steady deposits. If your documents are strong, debt is probably available and cheaper than you think.

How to decide, using payback math

Estimate what the money will earn and compare to the cost of each source over the same period.

1. State the amount and the expected added profit per month.
2. Calculate the total cost of the loan and the monthly-equivalent payment.
3. Check whether profit from the project covers the payment with room to spare.
4. Estimate the value of the equity you would give up if the business succeeds.

If the project pays for the loan within its term, debt keeps ownership intact. If it cannot cover payments, borrowing adds risk. The loan ROI calculation gives a template.

Where ROI Funder fits

ROI Funder places debt-style funding for established businesses: working capital, revenue-based financing, term loans, lines of credit, equipment financing and SBA loans.

It does not place equity. If you have 500+ FICO, 6+ months in business and $20,000+ in monthly revenue, you can apply for $5,000 to $5,000,000 and see offers without giving up ownership. Applying is online, uses a soft credit pull, and carries no obligation to accept.

Review term loans and working capital to compare structures, or read about how to raise capital across all sources.