The Pros and Cons of Seeking Investment Funding: Risk and Types

Last Updated on December 6, 2022 by Selina Parker

Investment risk is something that every business owner should be aware of when seeking investment funding. The investment risk associated with a startup company is different from that of an established company because the chances of failure are much higher for startups.

This article will discuss investment risks, pros, and cons of loans to help you make better decisions for your financial situation.

Government Start-Up Loans

Startup loans are government-backed personal loans designed to assist new businesses in getting started. The loans provide capital to emerging business owners who might have difficulty obtaining funding from a regular lender (such as a bank) and access to funding.

Pros

Maintain Your Business’ Complete Control
This type of funding does not require you to give up equity in your business, which means you can maintain complete control of all decisions.

Highly Adaptable
You have the power to decide how much money you need and for what purpose you will use it.

Unsecured Personal Loan
This type of loan does not require collateral.

Cons

Not Suitable For Everyone
One of the cons of personal loans is to be able to apply for a startup loan, your business has to be less than two years old and must meet the given criteria.

Limited Loan Amount
Your business can get a maximum loan amount, which means you might not be able to cover all the costs of launching a new company, so you may have to seek additional funding. But beware of debt consolidation if you choose this option.

It Might Affect Your Credit Score
If you apply for this loan, it will be a personal loan. Defaults in monthly payments may affect your credit rating, and your credit card balances might increase.

Business Bank Loans

You can acquire a bank loan through a large bank or a so-called ‘challenger bank,’ a more petite, recently founded bank that intends to compete with high-street banks.

You might think a bank loan would be a wise idea for funding to expand your business, consolidate debt, or cover credit card debt and other unforeseen expenses.

According to the Bank of America, the amount and terms of bank loans vary greatly depending on the lender. You can borrow anything from $25 000 to $100 000 with four years for loans secured by business assets and five years when secured by CDs, and competitive interest rates starting from 3.50%.

Pros

Flexible Monthly Payment Terms
It is an installment loan, and you can freely choose a repayment period that can vary between 24 to 60 months.

Easy Access
It has easy loan processing because it does not require much paperwork and can be approved faster than other forms of financing, such as venture capital or angel investors.

Fixed Interest Rates
The interest rate as low as 3.50% means there are no unprecedented changes in the interest.

Access To The Funding You Need
Loans of hundreds to millions of dollars are available to get the funds you require from a single source.

Cons

Reach The Minimum Annual Revenue
Your business must have a minimum yearly income of $250 000.

Secured Loans
If you default on a loan, all of your assets used as security will be at risk.

Bank Charges
You will have to pay a penalty fee for a delay in monthly payment or defaults.

Business Credit Card

Business credit cards operate similarly to personal credit cards, except the card is under your company’s name rather than your own. A business credit card is based on your company’s revenue rather than your income so that you can borrow more of it.

Like business bank loans, credit card interest rates and limits differ widely, with the most favorable terms offered to those with good business and good credit scores. The larger your profit and the better your credit report is, the more likely you’ll be trusted with a higher credit limit and lower interest rate.

Pros

Unsecured Personal Loans
You don’t have to give up shares in your company, so you can still have complete control over your business, and you won’t have to risk losing your company.

Emergency Cash
Several credit cards give you access to immediate cash in an unforeseen situation, especially for large purchases like equipment or vehicles.

Full of Benefits
Credit cards provide advantages that most personal loans can’t match, such as cashback on purchases, free travel insurance, 0% interest rate, and reward points.

Cons

Potential High-Interest Rates
Some credit card companies provide cheap introductory rates, but these typically increase after the trial period has expired (usually 12 months).

Not Accessible To New Business
Businesses that are already operational are the only ones who can apply for most credit cards. Taking out personal loan funds is more favorable than a credit card if you need cash to cover startup fees.

Annual Fees
Most credit card companies charge a yearly charge for each card you own.

Crowdfunding

Crowdfunding is raising money for your business idea from the general public. You need to pitch it to consumers or investors and offer something for their investment.

Several sorts of crowdfunding are available to you, depending on what kind of investment you’re searching for and whether or not you’re prepared to give up shares in your company.

Pros

The Best Alternative To Traditional Finance
Crowdfunding can help you raise funds if you do not qualify for business loans or credit cards.

Free Advertising
A successful crowdfunding campaign can be beneficial to your marketing efforts, which will make it easier to attract new customers and raise awareness of what you do.

Build a Loyal Following
Investors can become devoted customers and help your firm start strong.

Cons

Raising The Fund You Need Is Not Guaranteed
If you don’t meet your fundraising goal, you may have to return the investors’ money.

You don’t have complete control of your business.
Equity crowdfunding may result in you giving up shares in your company since it is a secured personal loan. You must consult the shareholders on significant corporate actions.

Highly Reliable For Marketing

A successful crowdfunding campaign necessitates substantial effort to generate excitement and get individuals interested in investing. It might take a long time and a lot of money.

Angel Investment

Angel investors are skilled and experienced investors who put money into businesses in exchange for a company’s share.

Business owners seek angel investment. When angel investors believe a firm is worth investing in, they will make an investment offer, typically between 2% and 25% of the company’s capital.

Pros

No Cost To Your Company
There are no fees or charges associated with obtaining angel investment.

Expert Mentoring
You’ll get access to seasoned business experts who can assist your company in development.

Cons

You Have To Give Up Equity
Your angel’s involvement in your business will prevent you from becoming the sole owner.

Possible Limitations On How You Can Use The Money
Angel investors will have a say in how you use their money. Product development, sales growth, team building, and expansion into new markets are typical applications.

Venture Capital Investment

It is another alternative to source funding wherein you’re a startup or an early-stage business. You may want to look into venture capital investment. Venture capitalists are members of risk capital firms who invest other people’s money in companies.

Pros

You Get Access To More Money
VCs typically invest more significant money in startups. So if you need a more considerable amount, this is an alternative.

Low Risk To Entrepreneurs
The entrepreneur is not required to repay the investment if the company fails.

Access To Connection ANd Mentorship
VCs offer more than just money- they also provide access to their expertise, extensive networks, and resources.

Cons

Less Control Over Your Business
Venture capitalists frequently demand a controlling interest in your firm, eliminating you from the entire leadership.

Now that you’ve known the pros and cons of a loan, you now have an idea of which to choose. Suppose you don’t want the idea of giving up equity and shares of your business. In that case, The Fully Funded Method provides you with helpful strategies on how you can raise capital for your business without giving up any equity or shares.