Invest or lend money to your business

No matter what your business, whether it’s a small retail store or a full-fledged manufacturing business, you’re going to need the cash (probably more than you initially thought). Where do you get the money from? Your first resort will be your personal savings. However, you still need to “capital injection”To begin with, especially if you are joining a partnership.

Speaking of capital, business owners have two main options for getting the funds they need. They could either invest or lend money. Both have advantages and disadvantages. In this article, it’s time to find out. Knowing the difference between investing with an equity investor and taking out a loan is important in choosing the approach that is best for you.

Borrow money to finance a business

Borrowing money to “make money” is not a new concept. And not only is this a known fact, for many companies it is also a smart choice.

Benefits of business loans

  • You retain full ownership of your business and the bank (or your lender) does not receive any part of your profits.
  • Managing redemptions is less complicated than accounting for the profits of your equity investors.
  • You are free to use the money as you see fit for your business.
  • Interest can be deducted from business expenses.
  • If only a small amount of money is needed, it is easier to get approval. There are also many types of loans available to suit your needs, from traditional bank loans to short-term loans.

Disadvantages of business loans

  • Having a bad credit rating reduces your chances of getting a loan.
  • Sometimes you need collateral on your personal assets to get your loan approved.
  • If the business fails, you are still obligated to pay it back.

Invest in your business

A common option for investing money in your business is to invest money. The funds go into your equity account. The term “equity” refers to the value or value which is generally referred to as the property of the owner, defined as the amount of company assets you possess. Another way to look at it is that the equity account is the amount that the owner has invested in the business minus the money that he has withdrawn. When you make an investment in stocks, it’s like buying property like a “piece of the pie.” In most cases, the amount you receive is proportional to the money you invest.

Benefits of equity investments

  • They may be able to provide significant capital, while banks may have great reluctance to lend money to business owners due to the risk of default.
  • The repayment system is more flexible with equity investments than with business loans.
  • Because they shell out their own money, investors can help a business owner create ideas and strategies, through mentorship, to further boost the business.
  • Investors are people who want your business to succeed and grow, because it also means “success” to them.
  • If the business fails, the owner, in most cases, does not have to reimburse investors until there is fraud or the like.

Disadvantages of investing in stocks

  • The business owner may have to share a larger portion of his profits with investors.
  • It can be difficult to find investors. Venture capitalist often invest in large companies which they believe can offer huge returns on their investment, instead of small companies.
  • Investors acquire legal rights when it comes to running the business (and can be part of the board of directors). Thus, the business owner may no longer have full control over the day-to-day operations of the business.

If you are starting a small business, what you should be looking for are “angel investors. Unlike venture capitalists who focus on maximizing returns on their investments, angel investors have more “altruistic” goals. They are often wealthy entrepreneurs who want to share their knowledge and help small businesses succeed.

How to avoid tax problems with your contribution

Whichever option you choose – lend money or invest – you need to know how to handle it in terms of taxes. If you are borrowing money, make sure there is paperwork. The written contract should cover the repayment obligation, penalties for non-repayment and other terms and conditions. If you want to invest in your business, also make sure you create a written contract and keep shareholder documents as proof, including the number of shares you are purchasing.

Final thoughts

What’s the best way to put money into your business? The answer largely depends on your tax and financial situation. Other factors should be taken into account, such as your credit rating (if you are considering a business loan), how much you can invest, your cash flow status, and your annual forecast. Experts recommend discussing your options with tax and business advisers before deciding and putting everything on a written agreement.

Troy M. Hoffman