You many lose control of your business
While there are many ways to structure the sale of a portion of your business, investors are generally interested in one thing – making a return on investment. As a form of compensation for taking on risk by investing in your business, investors are likely to want some sort of power in return. The terms of losing this power might be implicit or vague, but they are often there. Borrowing money instead of asking for investors can mean that you retain a higher level of control over your business.
Losing equity can be more expensive than borrowing
When you sell part of your business, you are also selling rights to future profits. A loan has a set time frame in which it has to be paid back. This might be as short as 30 days in the instance of a loan from an invoice financing company, or as long as 15 years if it’s a small business loan, but it will always be a set amount of time. When you sell equity, you pay future profits to your investors indefinitely, which can end up costing more than the interest on a loan.
Debt can make good tax sense
Among the costs of selling equity in your business are the dividends that you pay to the investor in the future. The cost of a loan is the interest that you pay on it. Fortunately, this cost is tax deductible, unlike the cost paying dividends to your investors.
Written by David Jackson, Founder and CEO of FundX