Equity investment vs business loans: which one is right for my business?

Find out the pros and cons of equity investments and business loans and consider which one could benefit your business

There are many ways to finance a business and two of the most readily available – and most popular – are business loans and equity investments. But what are they? And in what ways do they differ?

Business loans are much like personal loans - as a company you can borrow an amount of money under an agreement to pay it back within a certain timeframe and at an agreed rate of interest.

Equity investments are a little more complex, and perhaps the easiest way to think of them is like the deals made on the TV show Dragons' Den: you agree to give someone equity in exchange for an investment of capital. This equity can be exchanged in different ways, with two common approaches being:

• Giving up part-ownership of your business in exchange for a capital investment.
• Giving away a stock appreciation right; where an investor gains money based on how your stock prices grow- without you actually giving away ownership of your stock.

If you're looking to source finance for your business and the loan vs investment dilemma is one you're facing, the following pros and cons may be worth considering.

As you would expect, both business loans and equity investments have their advantages.

With equity investments, you benefit from not having to pay any interest on the money you receive and, what's more, in the unfortunate instance that your business should fail, you are not required to pay the money back to investors.

When taking out a business loan, one of the key advantages is quickly gaining access to the money you are borrowing. Once you have received your loan, you can then enjoy full autonomy over what to do with your money.

The flip side of a business loan is that you will be charged interest on what you borrow and, of course, you will need to pay the money back in line with the agreement you make with the lender.

With an equity investment, many of the disadvantages lie in the control you give to the investor, who will be likely to want some say in how their money is used to ensure their investment pays off. Onboarding an investor can be a lengthy process and the idea of sharing your profits with people outside of your company could take some adjusting to.

If your company is already progressing nicely, then either a loan or an equity investment could work and the decision may well rest on which option fits into your broader strategy for growth.

Equity investment can create an opportunity for you to bring on board an experienced business person- who may add extra value to your business through useful knowledge or industry contacts. If your priority is retaining control over key decisions that impact your business, then a business loan from a trusted lender may be a better fit for you.