Advantages and Disadvantages of Each Type of Capital

Starting (or growing) your business typically requires you to develop a capital strategy to fund your plan. And while there are a variety of entrepreneurs, business advisors, lenders, etc., that will tell you that their preferred strategy is the best, the truth is that there are advantages and disadvantages to each type of capital. Therefore, it makes sense to understand each one to help you determine the best course of action for you and your business.

Bootstrapping

In this strategy, there is no need to rely on a lender or outside partner; instead, you finance your goals for your business using your existing resources. The most obvious advantage to this type of capital is that you do not have to give up any part of your company, nor do you have to worry about repayments and interest rates.

The disadvantage, however, is that drawing on limited capital may also mean that you’re limiting your business’s growth and potentially putting personal financial assets and resources at risk.

Angel Investors and Venture Capital

This is capital that you receive from investors in exchange for an ownership stake in your company. It allows you to gain what is often a significant amount of capital at an early stage of your company’s growth – which is often the riskiest stage for investors. Additionally, this type of capital allows you to establish a proven track record with the investment community.

However, one major drawback is that this type of investment does mean giving up a sizeable ownership stake of your company and aligning yourself with a partner who may place increased expectations on you to scale the business in a certain timeframe. There is also the risk of attracting a partner who will ultimately end up being a poor fit for you and the company.

Venture Debt

An alternative to venture capital is venture debt which does not require you to give up any portion of your company. This form allows you to access cash much quicker than venture capital since less due diligence is required.

The disadvantages, however, are that you can end up paying very high interest rates, the terms are often punitive, and lenders can force an exit if they choose. Further taking on debt before cash flow is generated brings increased risk and pressure on the entrepreneur to execute successfully.

Growth Capital

Growth capital involves a minority investment by a private individual or company. While you are still selling a portion of your business with this capital strategy, you can still remain in control if choosing a minority growth capital partner.

However, this strategy requires selling a stake in the company, and there are additional governance requirements that you need to meet. Often, the growth capital partner will want some oversight into the operations of the company, typically through holding a seat on the company’s Board.

However, growth equity investors are generally quite experienced with scale ups and can impart advice and guidance that could be helpful.

Bank Debt

Finally, there is the option of taking on bank debt. With this option, you retain full control of your company, and the debt itself is predictable and consistent.

Disadvantages, of course, include interest payments and increased risk, as well as the potential that your debt covenants will restrict your flexibility. Further, significant bank debt is not easy to secure at the earliest stages of company development.

Contact CBGF today

Do you want to learn more about accessing growth capital for your business? We are here to help. Contact us today to discuss whether you might be a fit for CBGF.