Starting or expanding a business is exciting, but let’s face it—funding can be one of the trickiest parts of the journey. Whether you’re setting up a trendy café in Tiong Bahru or launching the next big app in Singapore, you’ll probably need some financial support. That’s when the big question arises: Should you get a business loan from a legal money lender, or is it better to bring in an investor?
The short answer is that while pitching to investors has its advantages, business loans are still the better option. Nevertheless, we’ll still present the pros and cons of each so you can make an informed decision.
Pitching to Investors
Investors are people who fund your business with their own money. In exchange, they will ask for partial ownership of your business (known as equity). Investors can be bigshots like venture capitalists, angel investors, or billionaires, but they could also be family members and close friends.
Investors have these advantages over business loans.
- No pressure to pay them back
Unlike loans, investors don’t expect you to repay them in monthly instalments. With that, your business has less financial pressure in the early stages.
- Mentorship and networking
More than money, investors can introduce you to their network of industry experts and highly experienced entrepreneurs. These are people you can learn from to help your business grow. The investors themselves can even offer to be your business coaches. - You don’t hold the risk on your own
If your business doesn’t take off, you’re not solely responsible for the financial loss. Investors share that risk with you. This has an added advantage – investors have a vested interest in helping your business succeed. Otherwise, they could lose a lot of money.
Just like loans, though, investors also come with a few disadvantages.
- You won’t own your business 100%
Investors own a piece of your business, which means they’ll have a say in key decisions. If you’re someone who values independence, this might be a deal breaker. - You must share your profits
You’ll need to share a portion of your profits with the investor. Once your business takes flight, you will be obliged by contract to share a certain percentage of the profits with your investors. - It takes time to find the right investor
Securing an investor isn’t just about money—it’s about finding someone who aligns with your vision. You’ll have to spend a good deal of time and effort to find an investor that fits well with your business.
Why Business Loans Are Better
In business loans, the source of the money you borrow can be a bank or a lender. Because it’s a loan, you are obligated to pay it back with interest. With that, the total cost of the loan will always be greater than the amount you borrow.
You may not like the extra cost, but business loans can benefit you in these ways.
- 100% ownership
With a business loan, your business is still fully owned by you. No one else gets a say in how you run things, and you don’t need to share your hard-earned profits. - You can plan the repayments
With a loan, you know exactly what you’re signing up for. You’ll have a fixed repayment schedule and interest rate (depending on the type of loan). With these, you can plan your business finances and how to repay the loan more easily. - Readily available
Singapore’s financial system is top-notch, offering plenty of loan options tailored to small businesses. Plus, if you have a solid business plan and credit score, securing one isn’t too hard.
Despite these advantages, you may want to think twice about getting a business loan if you’re concerned about these things.
- Inherent risks in taking on debt
Let’s be real—taking on debt is always a risk. You’re committing to regular repayments, even if your business hits a rough patch. - Interest can add up
Loans aren’t free money. You’ll have to pay back the principal amount plus interest, which can add up over time. - Approval can be tricky
If you’re a new business without much financial history, getting approved might be challenging. Banks, in particular, tend to approve well-known companies more easily than small, local businesses.
Conclusion
At the end of the day, there’s no one-size-fits-all solution. However, a business loan works best if you want total control of all aspects of your business. With this, you must also be ready to pay back the loan. Remember, it’s your dream, so choose the path that will give you the most freedom.
