Financing Your Business without Losing Ownership


When you need funds to grow your business or to launch a new idea for a startup, you quickly become aware that certain types of lending require you to relinquish partial ownership of the business.

Because of this, the desire to obtain funding is often at odds with the desire to maintain full business ownership; but you don’t have to compromise if you know what type of funding to look for.

When you need funds to grow your business or to launch a new idea for a startup, you quickly become aware that certain types of lending require you to relinquish partial ownership of the business.When you need funds to grow your business or to launch a new idea for a startup, you quickly become aware that certain types of lending require you to relinquish partial ownership of the business.With equity financing, money is raised by selling shares of your business to investors. Instead of paying them back on a monthly schedule, as you would with a loan, the shareholders earn money when your business profits.

With debt financing, once you pay back the initial loan (plus interest and other associated fees), you are completely done with the agreement and can return to business as usual, just the way it was before you took out the loan. However, if you seek equity financing, such as in the form of venture capital, you don’t simply pay back the investors to cover their initial investment. The investors will continue to own shares in your business, hoping to keep making money as your business profits.

One way that equity investors seek to ensure the success of their investment is by taking over a portion of the management of your business and supervising its operations.

“They usually take preferred stock in the company and want one or more seats on the board of directors,” states The Balance contributor Rosemary Peavler. “Small businesses [that] accept venture capital investments have to be willing to share decision-making power with the venture capitalists that have a stake in their firm.”

The involvement of investors in the management of your business makes it essential to ensure that any investments you take come from individuals or businesses with management styles and goals that align with your own. Regardless of how well your styles match, however, the situation can still be a big sacrifice for small-business owners who are just beginning to enjoy the freedom of working for themselves.

“You’ll have to consult with investors, and you might disagree over the direction of your company,” states Jared Hecht in an article for Fox News U.S. “You might even be forced to cash out and abandon your own business.”

If their investment does not go as planned, the board of directors may have enough incentive and a sufficient controlling interest to decide to fire the founders of the company. You can mitigate this risk by putting a clause in the original agreement that ensures your and any co-founders’ continued employment, but that may make it harder to find willing investors.

You can avoid all these complications and risks by taking out a loan from your financial institution. If you stick with a small, community-based financial institution, you’ll likely find more support and advice than you anticipated, as they are small businesses operating in your community, just like you are. They know just what it takes to succeed in your community and they find success when local businesses like yours thrive.

 

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