Many new businesses are faced with the decision of growing a business by giving up equity to a partner or seeking a bank for financing. The good news with this problem is that you have options, but the bad news is that there are a lot of factors to consider.
Whenever a client is in this situation, we always advise the client to write out all of their options while also detailing the pros and cons of each option.
Option 1: Forming a Partnership
Forming a partnership can be a fantastic move but can also turn into a nightmare. To figure out how to proceed, you need to ask yourself some questions:
What is your relationship with this potential partner?
If the potential partner is family or even a friend, sometimes those partnerships can end up messy and ruin your personal relationships. So, be aware of that.
What skills or experience does this potential partner bring to the table?
Is this potential partner going to be active or passive?
Do they possess any skills, experience or have connections that can help you grow your business?
If the answer is yes to these questions, then theoretically they will be bringing more than just capital to the table which can go a long way. A lot of entrepreneurs are hesitant in giving up some equity and in some instances rightfully so. But, if you will be getting more than just capital for forming a partnership then it can be worthwhile. Also, keep in mind that you can offer a combination off ownership and percentage of sales when negotiating with this partner should they want more ownership than you are willing to give up.
Option 2: Loan From Bank or Special Program
Have you tried to apply for a loan through a bank (either community or regional)? Many banks are still anxious to attract new business customers and in many cases currently have special lending programs at very attractive terms and rates. If you don’t have a personal banker, you should request one. In working with your bank, be as forthcoming as possible regarding your history and your needs. Your banker, in turn, will tell you exactly the information he or she needs to present your “best case” to the bank’s credit committee. Be sure to provide no more and no less than what is specifically requested. The banker may advise you that in order to obtain a loan you need to increase operating cash flow in the business. Also, your local bank is your point of contact for federal Small Business Administration (SBA) and similar state programs. It’s certainly to your benefit to ask about special SBA programs for designated urban areas that you may be eligible for.
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