The statistics show that 20 percent of businesses fail within the first two years that they are open. Majority of these failures are due to a lack of finances.
This is why it is important to understand how you can get funding for your business. You need to understand the difference between growth capital and venture capital.
The difference between the two can be confusing; use this guide to help you make the best decision for your business.
What is Growth Capital?
Growth capital typically comes in one of two forms: secured loans (where collateral is required) and unsecured loans, which are backed only by an entrepreneur’s reputation.
The type of financing that you need will depend on the type of business you’re running. Growth capital is typically provided by one or more financial institutions, such as credit unions, banks, and insurance companies.
The funding from this type of financing may be used in many ways including expanding marketing campaigns, purchasing new equipment, or for research and development purposes.
What Is Venture Capital?
Venture capital is a private equity investment in a company. The investor usually takes an ownership stake such as 20 to 30 percent of the business’s earnings, and the entrepreneur receives funding to grow the business.
This type of financing typically does not come with any predetermined conditions that need to be met before repayment can occur. That’s why it’s called “venture” capital.
Pros and Cons of Growth Capital
Growth capital offers flexible terms for repayment, which can be an attractive option if you’re trying to quickly pay off debt or just need enough funds to last until your company takes off.
This type of financing could prevent an entrepreneur from taking out loans or other types of capital in the future, which can hinder their growth strategy down the line. This is especially true if the entrepreneur found it difficult to repay the loan and developed bad credit.
Pros and Cons of Venture Capital
Venture capital offers a lot of benefits for entrepreneurs, like giving them access to more money and providing an opportunity to tap into expert advice.
A major benefit of venture investment is the expertise and time that an investor can provide in navigating the complex challenges faced by growing companies.
Venture capitalists often have a network of people they can turn to for advice. These people may be experts in finance, marketing, or management which might not be possible for an entrepreneur to assemble on their own.
This type of investment can be hard to come by, and when companies do find venture capitalists interested in their business, they may not get the desired 20 to 30 percent equity stake. Sometimes these investments are only offered if an entrepreneur agrees to give up control over the company and take on a CEO position.
Growth Capital vs Venture Capital
Growth capital and venture capital are both different, but they can be suitable for different businesses depending on their needs.
If you need help deciding which is best suited to your company’s needs, speak with a business consultant like Solomon RC Ali, this is one of the best ways to clear up any confusion you may have so you can get the right financing to grow your business.If you are interested in arranging capital for your business, feel free to reach out and we’d be happy to help.