What is best way to increase cash flow: a business loan or equity financing?
This article was created in partnership with OnDeck.
You may recognize our next industry expert.
She is best known for turning a thousand-dollar business loan into a billion-dollar business. Barbara Corcoran is an acclaimed entrepreneur, investor and judge on ABC's "Shark Tank."
For the second year in a row, Barbara Corcoran has partnered with our friends at OnDeck to answer questions on how to better run a business. This year, instead of accepting questions directly from small business owners, Barbara chose to answer questions submitted by prominent small business websites that you can also turn to for direction, like Business.com.
We had over 5,000 questions for Barbara, thanks to our robust community. The topics ranged from securing funding and attracting new customers to preparing for business setbacks, hiring a lawyer and more. Barbara selected a topic that every small business owner is likely to face.
Mark Hoppe runs a small beekeeping business, producing and selling raw honey at farmers markets in Los Angeles, California. Mark's been running the business on a shoestring budget for 13 years and wants to double the size of his business.
The question of how to increase cash flow frequently comes up in Business.com community discussions. Here's how Barbara addresses the challenge.
Q: What criteria should I consider to determine whether a loan or cash infusion would be better for growing my business? – Mark Hoppe, Business.com Community Member
A: That depends on what you'll have to give up and if it's worth it. There are several criteria to consider, but focusing on the pros and cons of each option is a good place to start. You need to ask yourself: How much money do I really need and am I willing to give up some control to get it? Can the business readily service the debt and, if not, what will I have to do then?
Making a list of the real benefits you expect to get and rating each benefit will give you clarity of mind and help you make the right decision. While taking out a business loan allows you to retain control of your business (because you have not sold stock to an investor), it can impose financial restrictions on your business. Equity financing can provide relief from any debt service and also give you access to experienced investors but will cost you equity and control. – Barbara Corcoran, Entrepreneur and "Shark Tank" Judge
In addition to Barbara's sound advice, here are two additional points from the Business.com community to consider when deciding between accepting a business loan or making a deal with an investor.
1. It may be a shorter commitment to take out a business loan.
Like Barbara advised, taking out a business loan allows you to retain control over your business. It could also be a shorter commitment. Before accepting a business loan, you will agree to a repayment plan knowing exactly how long you are committed for.
You also have the flexibility of making larger payments if your business is doing well, giving you more control over the length of time you spend paying off the loan. A good investor is likely to always be interested in the position and health of your business, making the relationship between business owner and investor last much longer.
2. Investors can bring more to the table than just money.
The real value of taking on an investor is not necessarily the amount of money they can offer you, but the industry experience they can enlighten you with. A well-connected investor can give a new business credibility and help you land customers.
If the investor is part of a venture capital firm, they are likely to have their own marketing department that can assist you with press releases, plus they can help secure invites to industry events.
Before deciding on an investor, you should ask how long they have been in the industry and find out what other types of businesses they have invested in. Investment in similar business models or ideas will help you gauge the investor's connections for recruiting talent and introducing you to other partners.
Thank you, Barbara Corcoran, for sharing your insights with the Business.com community. Determining the funding options for your business requires careful planning and consideration. Take advantage of online resources like Business.com and OnDeck to help you come up with the right plan.
Whether it's getting answers to your business questions in our Q&A, learning new business skills through our expert content, or comparing prices and gathering information on business products and services, Business.com's resources are right at your fingertips.