If you are an entrepreneur who is just starting out on building a small business, getting additional funding to allow your business to grow is probably one of the most difficult tasks that you would have to face. If you decide to take out a loan from a bank or a traditional lending institution, you would usally need to live with some very high interest rates. It will take at least 1 to 2 years (or more) before you can break even with the venture capital that you spent to get your business from the ground up. If you take on a short loan from a bank, you are caught between high interest rates, the need to place a hefty deposit and you will nearly always need to place your house as collateral.To overcome this dilemma, what you can do as a smart business owner is to take a look at other funding options. If you are a lone business owner and you would like to expand your company’s operations, take a look at the following list of pros and cons when you take on a personal loan versus a commercial loan:
1. Commercial Loans
Commercial loans, especially the ones taken from banks, will require you to place a collateral, which can take the form of a certain percentage of the shares on your business. The disadvantage of this setup is that you are risking the stability of the business as a whole in exchange for some development capital which has significant interest rates.
2. Venture Capital
Private equity or venture capital offers business owners the opportunity to raise equity capital for a higher-risk or early stage business. VC funding however requires giving away a large chunk of equity plus can take 3-6 months to pitch to the investors and structure an investment. Also VC firms tend to ‘put a foot to the throat’ which may not suit your workstyle and limit some of the operational decisions you can make. On the plus side a good VC firm can become a fantastic and highly valuable strategic partner can can assist you make the right strategic and business decisions.
3. Peer to Peer Lending Platforms
If you take on a personal loan from P2P sites like Prosper.com, LendingClub.com or Lendinghub.com.au and use the money that you borrowed to expand your business, you as a business owner will get to keep all the equity and still have full control of the decisions regarding your business. Not only that, but you will also quite likely enjoy significantly lower interest rates when you borrow money through these sites. Business funding taken from social lending websites work in such a way that the ‘middlemen’ – in the form of banks and lending institution – are eliminated.
In general, it is always a good idea to take a look around at a range of equity and loan options if you are looking for funds for business expansion. As innovative concept peer to peer loans may offer you the opportunity to fund your business whilst retaining greater control and with a more favourable economic profile for you than the more traditional banks or venture capital sources of business funds.