Small Business Loans vs. Venture Financing

So you’ve got a growing business. All signs point to success — proof of concept, buzz, traction, growth, etc. Everything is great except for that pesky revenue figure. You just need an infusion of cash, so what’s the best route to take – small business loans or venture financing?

How Does a Small Business Loan Compare to Venture Financing?

Influence on Spending

Perhaps the biggest difference between venture financing and a small business loan is that in the latter case the loan originator doesn’t have (or necessarily want) a say in what you do with the money. Small businesses use cash any way they see fit — whether it’s purchasing inventory, adding staff, expediting deliveries or opening up any other channel to growth.

Investors, of course, want continued influence — sometimes even a board seat, from which they can help decide major events in your company’s history. Plus an investment from VC itself signals a purchase of a percentage of the company. Cash advancers make no such claim to ownership.

Risks to Consider

The best thing about venture capital is that, by its very nature, you don’t have to return lost money to the investor. More specifically, if, for some reason, your company goes belly up — well that’s the price of doing business for a venture capitalist.

On the other hand, a small business loan is made with a set of its own terms, including a recovery schedule. This is the tradeoff for not having to give up any of your business ownership stake in the transaction.

Speed to Receive Funds

Relative to VC, financing from a bank is pretty fast — usually in 2-6 weeks. Kabbage has further expedited the process of getting cash to SMBs quickly, delivering it into your account in fewer than seven minutes.

Raising money from venture capitalists can take months, if not years. Closing the deal is an arduous process as investors bring you in again and again to make sure your company is a good bet. Then they do their diligence by reaching out to several members of your network and affiliates just to make sure you’re on the level. Next they still have to push the deal through their own board, all before actually cutting a check.

Ease of Application

Money follows the smart money. What that really means is that if you have top-line investors, other investors down the chain will continue to throw money at you. But, as I’m sure you know by now if you’re reading this, it’s not always easy to attract investments from the Sequoia Funds of the world. And if you have lower-tiered investors, other investors might think it’s “dumb” money and be reluctant to ever invest.

Small business loans don’t really take part in this popularity contest, and aren’t on the spectrum of smart or dumb money (unless of course you take out a dumb loan with a 30% recovery fee). They are what they are: cash with very few strings attached. They’re also a private matter; while investments need to be disclosed to the SEC, loans are your business and your business alone.

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