Do you rely on a Lucky Eight Ball when making investment decisions?
investment planning Jun 24, 2021Five NaviSTAR TIPS to help you decide: Which type of investment is right for you: Debt or Equity?
For many SMEs, getting expert help to make important decisions is not only sensible; it can make the difference between success and failure. Especially when it comes to financing, and in particular, investments.
Just because you run a business does NOT mean you are expected to know everything. Therefore, take every offer of expert advice you can. Paid or unpaid, it doesn’t matter as long as the giver of the advice is credible and experienced. If not, then you may as well use that old favourite – the Lucky Eight Ball.
If you want to fail that is!
However, for more extensive, yet comprehensive advice; download the Navistar Legal ‘Raising Investment’ e-Book now. It’s a handy guide full of sound advice to help you find the financial confidence to grow your business.
But if time is short today, then here’s a summary of the first points to remember when deciding which investment is right for you.
1. Know the difference
Debt investment
Debt investment involves borrowing a fixed sum from a lender, such as a bank; which is then paid back with interest. The funder is usually referred to as a ‘creditor’ or ‘lender’. Debt is a great option if your company credit score is acceptable. Bear in mind, however, that a personal guarantee or security, often in the form of property or assets, will be required.
Equity investment
Equity investment is the transfer of funds to the business, in exchange for some form of percentage ownership – usually shares. This type of investment can take the form of several smaller investors, sharing the company out accordingly; or one large investor with whom you would negotiate a percentage ownership of your company. Note: There is also a hybrid of the above.
2. Ask powerful questions
As explained above; when we talk about ‘raising investment’, we are usually talking about debt (borrowed money) or equity (ownership).
Not everyone will have the financial expertise to know what’s right for each situation. If you can’t access legal help straight away, then do make sure you fully equip yourself with as much knowledge about your lender or investor as possible; before committing.
And remember, the source of funds can often be as important as the types of funds. And relationships with either will be inevitable. Therefore you need to check, check and check again. Remember, you’re not looking for friends here. You’re looking for professional, experienced lenders or investors who will ideally have the same business ethos as you and a credible track record of lending or inputting value to a business.
The investment you accept must be free from emotion: and all about the benefits the investor can and will bring to your business. So you must know who you are ‘jumping into bed with’. It was investor, Entrepreneur and Financial Advisor Robert Kiyosaki who said on Twitter “In the world of money and investing, you must learn to control your emotions”. That’s true from both sides of the equation: both for the investor and the company looking for investment.
3. Do you need more than money?
A lender will usually be happy to allow you to run your business as you wish; making all your own decisions as you go. After all, you will be repaying them all monies loaned, plus interest, regardless of whether your business succeeds or fails. Sad but true!
Whereas equity investors often fall into two categories. Those that want to get fully immersed in your business and those that don’t. Those that want to be involved may look to influence business decisions and company direction; often attending meetings. The benefit to this type of investor is the wealth of expertise and experience they can bring to the business; including their many contacts. Often they have been through most of the scenarios or ‘bumps in the road’ you may encounter on your business journey and can advise accordingly.
The other ‘variety’ are usually happy to invest their money and, hopefully, watch it grow. But from a knowledge resource angle, you’re still pretty much on your own…unless you are not providing a return on their investment of course. Then questions may be asked. Therefore it’s always advisable to give realistic timeframes for their financial returns and agree on these at the start.
Think carefully about what you want; and always refer to point two (above). Ask questions, conduct extensive research and complete due diligence. This is YOUR business and YOUR future. What type of investment or shareholder is most likely to grow your business in the way, and at the speed you desire?
4. Which is the more cost-effective choice?
Okay, this may seem like a non-answer. But the decision really has to be based on your individual requirements. Only you know your end goals and your particular finances. And you need to go through all the above to help form your final decision.
Our advice here is that it may be prudent move to invest in some financial advice at this stage too as your finances may show one decision is better than another. Consider your internal resources too, as in point three. Because an extra business head, with a vested interest, can sometimes prove invaluable. But you need to weigh this up against the possible loss of control you may keep over your business.
On the other hand, a straightforward injection of cash could be just what you need to propel your ideas and your business forward. If you have a good credit rating, an excellent business plan, sound projections and passion for driving your business forward, then debt investment may well be the right decision for you. It’s often simpler; and once it’s paid, it’s paid. It also allows you to keep your business firmly…well, yours. And don’t listen to Bob Hope! “A bank is a place that will lend you money if you can prove that you don’t need it.” – Bob Hope
5. Alternative options
You may decide, after reading this article, that neither equity nor investment financing sounds like the right fit for your circumstances. Possibly the answer for you could be a loan from family or friends, using your credit cards; or simply a straightforward bank loan. Even pensions are, subject to terms and conditions, a viable option for raising funds for your business.
There are many financial opportunities available; with many investors only too happy to support those that need it. And banks with money to loan to a credible company with a viable future. What’s important, is to know which type will help your business grow. And digesting our 5 Tips to help you decide which type of investment is right for you: Debt or Equity? - will enable you to start asking the right questions; narrowing the choices down towards the right one. And if you can’t decide, don't be tempted into throwing that Lucky Eight Ball.
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