Should I Get A Loan Or Sell Equity To Finance My Start Up Business?

Filed in archive Financial on February 27, 2007

Loan vs. Selling Equity? It depends on a number of factors.

Selling equity in your business, as a way to raise funds, is very expensive. You are giving up a percentage (%) of your business forever.

Whereas, getting a loan is cheaper. You keep full equity and pay the interest costs.

I went through this issue. Let me share my personal experience.

Many years ago when I was in start-up mode, I took money from a couple of business people and gave them 49% of the company. On the way to the bank, I wondered if I was making a mistake. But I deposited the money anyway. It was a secure feeling having the extra cash in the account.

However, I should have listened to myself. Within the first 30 days I had closed deals worth $60,000 of profit or appox. 4-6 months of operating expenses.

I did not need the capital after all. I would have had more than enough cash. But I gave up 49% for that initial investment! Very expensive financing.

borrowing money is always cheaper.

If you are a new entity, new to business or need money to continue product development and research, then venture capital is the way to go. They will take the risk where other lenders will not assume risk.