It takes money to make money, whether that means purchasing inventory, leasing equipment, or paying salaries to employees. Most small businesses need financing at some point during their growth trajectory, and determining how to secure that capital is an important business decision.

The two main ways to secure business capital are through business loans or equity financing. These options are distinctly different. With business loans, you retain all ownership and decision-making power in your company and simply repay the loan, with interest, according to the lender’s terms. With equity financing, instead of borrowing money that will have to be repaid, business owners give up some control or ownership in the business and take on an equity partner.

Each type of financing can be the right decision for various businesses. To determine which is the best avenue for your business to raise capital, consider asking yourself these five questions. 

Is your business attractive to equity firms? 

Equity financing is only available to businesses that are attractive to equity firms — and they are typically drawn to solid financials, promising business plans, and dynamic leaders. To build a case for equity financing, you need a solid valuation and assessment of your business that includes expectations of future growth, capacity of leadership team, debt load, and other details. It’s a good idea to use an outside auditor to value your business in order to portray an unbiased assessment.

In addition, you will need clean financial documents and a solid business plan. Finally, most equity firms are just as interested in the people as the businesses with whom they partner — so consider whether you can portray a dynamic personality, passion, and leadership style. 

Do you want to maintain control of your business? 

In most cases, private equity firms will require some control of the business in exchange for funding. In some cases, you may be able to retain some management control for a time, but ultimately, the equity partner will usually take control.

With a business loan, on the other hand, you’ll be able to maintain control and make all business decisions. You’ll just have to repay the loan over time.

It’s important to honestly assess whether giving up some control of your business is acceptable in order to access financing. If retaining all management control is a priority for you, a business loan will likely be the best choice. 

Are you interested in reducing your ownership in the business in exchange for funding? 

In addition to giving up control or full management, accepting equity funding usually means you’ll also give up a portion of your business ownership. If you’re considering this, determine how much ownership you’re willing to give up in exchange for the capital.

For example, you may be able to negotiate to maintain a majority ownership stake for a lesser amount of capital. However, if you’re determined to maintain full ownership in your business, a business loan is probably a better fit for your capital needs.

Do you hope to leave your business to children or other family members? 

Many business owners dream of leaving their business as an inheritance to their children or other family members when they become ready to leave the day-to-day management. When the new managers are also committed to and passionate about the business, that plan can be fulfilling for all parties involved.

However, if you accept equity financing and give up control and ownership of the business, you will probably not be able to leave your business to family members. Instead, the equity partners will make decisions about who will take your place when you’re ready to exit.

With a business loan, however, you will retain ownership in the business and can leave the business and its assets to whomever you choose. You’ll just need to arrange for the repayment of the loan over time. 

Do you need temporary financing or long-term capital? 

Equity financing is a long-term solution that changes the makeup of your business. For example, equity partners are likely to assert some control over the management of your business and have a voice in business decisions. In exchange, they will provide long-term capital and they may be able to provide additional resources and insights to help build the business.

A business loan can be a short-term or long-term solution, depending on your needs. Some business loans have a specified payoff term, such as 10 years, while others are set up as lines of credit, which can be available whenever you need them.

Determining the right option for business capital will depend on your appetite for long-term change and loss of control in your business, and answering these five questions can help you decide. 

Wintrust Ventures focuses on the unique needs of early-stage companies, offering guidance, networking opportunities, equity capital, banking services, and wealth management tools to support innovation in Chicago and beyond. Contact us for more information.