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Should you accept outside capital to grow your business?

Key points in this article

  • Ways you can gain outside investment
  • Pros of accepting investment
  • Cons of investment

Accepting outside capital, where someone usually invests in your business in return for a percentage of the shareholding, can be exciting. It offers cash that you can use to grow a lot bigger. But it’s important to weigh up the pros and cons of accepting investment before you begin down this path.

Ways to get outside investment

Investment can be sorted through a variety of means – for both a new start up and an established business full of growth ambitions.

You can raise money through:

  • Friends and family who may be interested in supporting your business
  • Angel investors who are usually private backers with surplus funds to invest and often have knowledge of your industry
  • A venture capital firm that raises money from a number of people, then invests these funds in potential high growth businesses
  • Government or other funding - sometimes your business may qualify for some form of assistance or grant

First look to your friends and family before considering other outside investments

Pros of accepting investment

Seeking investment to start up or grow has clear advantages, over and above the inflow of cash.
We highlight two of these advantages below.

 

Speed

You’ll be able to take your business to its next stage faster. By accepting outside capital, your business can move forward immediately without having to rely on building up a cash reserve over time.

If you need to move quicker than a competitor, such as requiring funds for product or market development, you may need finance fast.

 

Able to tap into external expertise

It’s highly unlikely that an investor will provide you with finance and then leave you alone. One of the main advantages of investment is the expertise and advice that comes along with it. For example, an investor could help you with:

  • New channels to market or introductions to new clients.
  • Access to other technology or processes that they have knowledge about.
  • Partnerships or strategic alliances with other businesses they’ve invested in.

Management of your business, especially if you need to employ more people and haven’t had experience in dealing with layers of employees.

Speed and external expertise are two key reasons why choosing outside investment is a positive

Cons of accepting investment

The obvious disadvantage of accepting investment is the commitment someone else has invested in your business. Two further disadvantages are emphasised below.

 

Loss of control of your business

If you choose to seek investment through angel investors or venture capitalists, you’ll probably lose some control of your business. In other words, the investor will want to have a say in how you run your business, possibly asking you to form a board to help make decisions.

 

Splitting the rewards

Once you sell a part of your business, it’s very hard to get any of it back. From now on you’ll split any potential profit or dividend with the other shareholders. You’re also unlikely to have as much freedom as in the past with your salary, drawings, or any business perks, without full disclosure.

Two negatives of outside investment are split rewards and loss of control

Any advice does not take into account your personal needs, financial circumstances or objectives and you should consider whether it is appropriate for you.

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