So You Need to Invest In Your Own Business? Here Are the 4 Options to Consider (and Their Trade-Offs)
Do you have your next “play” in mind for your business ? If so, your next move is to decide how you are going to finance it.
When you have an investment to make in your business, what do you do? Consider these alternatives:
- Forgo the investment and try to get by with what you already have
- Pay cash
- Raise equity
- Get a loan
When it comes to making your choice, the most important thing is to think both offensively and defensively, recognize that the world (and your business world) may look a lot different a year from now.
Yes, you always should be thinking about growing your business — the philosophy about falling behind if you’re not moving ahead is true — but you should make decisions based on the possibility that things may go south, too. Remember that very few businesses grow in a straight upward line.
Consider the trade-offs
In each of the four options, there are potentially positive and negative aspects.
1. Forgo the investment and try to get by with what you already have: By sitting on your hands, you avoid taking on debt or losing control of your company, but you may miss out on opportunities. As an example, sometimes companies pass on hiring exra salespeople as they can’t afford the expense. The flipside is that they won’t experience the potential opportunities that the new sales talent could present.
2. Pay cash: Paying cash is simple and convenient if you have it on hand. But if the world flips on you later down the line, you could find yourself in a precarious financial position. Sometimes business owners choose to buy equipment with cash instead of financing it. And a year later they face a cash flow crunch because something unexpected happened, and they are struggling.
3. Raise equity: As for equity, the favored method of “Shark Tank,” the idea of new partners may be exciting and could open up a whole world of possibilities. However, giving up equity in your company is potentially dicey. It’s not out of the question that you’ll clash with your new partners or even be shown the door at some point.
While “Shark Tank” likes to give updates on all their success stories, there are plenty of times where the partnerships fail miserably. I hear many cases where investors lose interest in a company they invested in — because they are not performing to their hopes and expectations. And then the entrpreneuer is left hanging, with their dream and vision on the line.
Finance the investment: Then there is getting a loan, my preferred method. If you can line up a low-interest SBA loan over ten years, you likely can accomplish your goals while still being able to breathe financially.
Remember that debt isn’t necessarily a bad thing. Of course, the downside of taking on debt is that no cash infusion is guaranteed to fix whatever ails your company. Also, too much debt can start a death spiral.
What I suggest is that at every junction when you think you need money, slow down and consider all of your options. On the debt options, find out how much you are able to borrow with a monthly payment that you are comfortable with. And then decide which approach is best for you.
In general, it’s smart to be at least somewhat conservative with your plans. The fear of making a move can’t paralyze you, but conserving cash where you can and having some reserve for a rainy day is always a good idea.
