The pros and cons of five SME funding options

(3) Venture capital

This funding option typically involves having ideas that have good potential of growth to convince venture capitalists (VCs) to finance the idea for high ROI. VCs provide not just financing, but mentorship and expert guidance.

After financing an idea and rendering support and assistance, VCs gain their ROI when such idea grows and increases in value.

Pros:

● Guidance and consultation – VC firms often have a team of experienced professionals that will actively assist in HR.

● Active support – Besides funding and guidance, a VC firm will also render support on legal issues, tax and similar issues for the startup it’s funding.

● Connections and networking – Companies will get access to the professional network and connections of the VC firm.

● No repayment of loan or interests – Unlike loan, startups being backed don’t have accumulating interests to pay off. Instead, the VCs are sold some stocks/shares from the company.

Cons:

● Little control – The more money a VC invests, the more control they’ll have on the business.

● Divided ownership – VCs who invest a lot of money can hold as much as 60 per cent shares in the business. This gives them more authority over the business owner.

● Low chances of getting funded – VCs only invest in the ideas they consider more promising. It’s noted in a survey that VCs look at around 400 ideas for every one which they invest in.

● Limited time range – Most VCs fund only businesses that have great chances of fetching them returns on their investment within a period of three to five years.

(4) Angel Investment

Angel investors are successful business people who hope to finance the birth of a promising idea or to help expand a business, while also providing mentorship and expert guidance.

It shares similar advantages and disadvantages to VC investment, with the major difference being that angel investors are often successful people or a network of wealthy individuals, while venture capitals are firms.

Also, VC push in more money to businesses than angel investors and often expect higher equity. One other difference is that from the survey mentioned in the cons of VCs above, angel investors invest in 40 ideas for about every 400 ideas they review.

(5) Loans

Those who can’t raise funds through any of the above resort to loans. While VCs and angel investors invest ideas for equity, loans are granted on instalment payment and interests, and the rules or interest rates differ depending on the type of loan issued and the terms and conditions of the issuer.

Pros:

● Personal loans are unsecured and unmonitored – It does not require much documentation, neither does it require collaterals or security. Also, the use of personal loan is unrestricted.

● Personal loans are easy and fast to acquire – Different platforms enable for quick availability of personal loans. In UK, sites like Personal Loan Now can help you get finance online in minutes even with a bad credit score.

● No sharing of profits or ownership – All profit and returns achieved through a loan of any kind solely belong to the business.

● Entrepreneurs can liquidate the business to payoff parts of or all the loan in the event of business failure.

Cons:

● All loans accumulate interest and this interest can add up really fast.

● The bank loan application process is usually tasking and requires a lot of details like collaterals.

Choosing a funding option

These funding options all have their advantages and disadvantages. Even after comparing the different pros and cons, it can still be difficult to decide which option to pursue. So here is an overview of points to take into account.

● Is your business/idea very technical with great potential for growth, and are you okay with divided ownership? Consider either angel investment or venture capital.

● Is your idea less technical and will entice a huge audience? Consider crowdfunding.

● Does your idea require huge capital to run it right from conception? Go for venture capital or angel investment.

● Does your idea require $100,000 or less? Consider crowdfunding or bootstrapping.

Joseph Chukwube is an experienced digital marketer and guest blogger. He is the founder and CEO of Real SEO Growth, an internet marketing agency where he helps small businesses thrive on the web.

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