For any business, choosing the appropriate financing structure is a crucial decision. Entrepreneurs can choose from various solutions for financing their businesses; business loans and venture capital are two options available.
Venture Capital is a form of private equity provided to startups and early-stage growth companies. Business loans are debt offered by financial institutions and banks to run day-to-day business operations.
9 Key Advantages of Venture Capital Over Business Loan
Venture Capital can also be described as a financing tool for a startup and an investment vehicle for affluent individuals and institutional investors who want to invest in businesses with a long-term growth perspective.
Venture capital financing is usually geared towards funding businesses that do not have an established brand yet, and have unpredictable cash flows. Business loans may be a more suitable option for a company that has already established a presence and is looking at funds for a specific purpose like expansion or day-to-day operations.
Here’s a list of some venture capital advantages vis-a-vis business loans below:
1. No Pressure of Monthly Payments
Venture capitalists invest in an enterprise intending to help the company grow and exit it within 5 to 7 years. Businesses do not have to bear the burden of paying interest on loans, and they do not have to make monthly repayments, which gives the business flexibility and additional liquidity to run its operations and invest in expansion, hiring talent, marketing etc.
Even if the business fails to pick up, the entrepreneur does not have to repay the amount, which is not the case with a business loan.
2. Business Can Raise Large Amounts of Capital
A new enterprise seeking a business loan faces constraints like a lack of sufficient experience, no collateral to pledge, lack of credit history and so on; this may prevent them from getting a big business loan.
However, this problem is resolved by venture capitalists. VC firms are willing to inject large amounts into startups which banks or FIs may not be keen to offer a business with no track record. Furthermore, startups can have several rounds of VC financing for their business.
3. Support for High-Risk Ventures
Securing a business loan can be challenging for entrepreneurs with high-risk ideas. In such a scenario, venture capitalists offer funds and expertise. Banks are more risk-averse than VCs; therefore, they are less likely to finance high-risk startups.
4. Increased Visibility
One of the venture capital advantages is better visibility for the startup. Associating with VCs that are well-recognised increases the brand value of the startup and also boosts its credibility.
The mention of the business on the VC's website and its presence across multiple channels make it more visible to customers, partners and other potential venture capital firms.
5. Raise Additional Capital
Venture capital firms are willing to infuse more funds into a business to increase its valuation. They are also keen for startups to raise additional funds at a higher valuation as it increases their return on investment.
For this, they may bring in more investors at a later stage; they may also reserve additional rounds of funding for the future. Businesses can benefit from VCs introducing them to more firms willing to invest funds or by the additional capital the venture capital puts in their business.
6. Mitigating the Risk of Failure
When a FI offers a business loan, they do not provide additional support to run the business. VC firms have experience funding startups, which can help founders manage risks inherent in most startup ventures.
With a proficient team to oversee day-to-day operations and growth, a startup can avoid major hurdles and reduce the risk of failure. Having an experienced partner can help a new business deal with a complex situation and improves the likelihood of making a sound decision.
7. No Need to Pledge Assets
FIs and banks may expect a startup owner to pledge assets due to a lack of sufficient business history and the inability to provide financial statements.
However, most venture capitalists do not ask owners to offer assets as collateral to seek financing. This is a relief for startups as their funding is not linked to them having sufficient assets to serve as collateral for a loan or may not be willing to pledge their personal property.
8. Better Networking Opportunities
Businesses can benefit from the extensive network of connections that VCs have to help grow their business. Venture capital firms can introduce entrepreneurs to potential partners, new customers and a pool of talented employees.
Additional venture capital advantages include getting more funding and negotiating better deals. The business can also benefit from tapping into the pool of connections VCs have within the business community.
9. Long-term solution
Venture capital financing is a long-term financial solution with a window of 5 to 7 years, within which they plan to exit the enterprise. This period gives a young business sufficient time and chance to establish and grow.
Unlike business loans, which are for shorter periods, venture capital financing allows more time for a startup to become profitable. During this time, the startup can not only enjoy the funding but can benefit from the practical assistance and expert guidance of a VC firm.
In Conclusion
India has a great startup ecosystem, and the success rate of startups in India is much higher than in other countries. The number of startups in the country went up from 452 in 2016 to 84,012 in November 2022. Venture capital advantages and their crucial role in sustaining and enabling this ecosystem deserve recognition.
With Scalix, startup founders can avail of multiple business-building benefits, such as getting funding and the required support is much easier. You can learn more about the investment and startup world and connect with other founders.
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