Is selling shares in my company instead of taking out a loan the best thing to do?

Is selling shares in my company instead of taking out a loan the best thing to do?

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A: If you really want what we term – “sunk” – long term capital in your business that you don’t have to worry about paying back in the same way you would a loan, then selling shares in return for funding  may be right for you but that is too simple an answer when there is alot more involved in that simple transaction.  

We cannot effectively answer that question here but in essence there are a few key things to consider.

  1. An investor who becomes a shareholder will expect you to perform to the plan they invested against
  2. They will expect you to provide an exit usually by way of a trade sale of the business at a point in the future
  3. They will expect you to be in receipt of regular management information
  4. They will sometimes expect to be board member and or be employed by the business to help manage their investment .
  5. They will only invest against a shareholder Agreement that sets out the terms of that investment and some of the “do’s and don’ts” of that arrangement. They will almost certainly require certain restrictions and limitations on things you can do without their permission.
  6. Of course any and all of those things may also be helpful to you in achieving your potential providing it was your intention and your business has the capability of being sold at some later point but ideally within 3-5 years of the investment.
  7. If you have no revenues or trading record and are early stage or start up then it is unlikely you will be able to borrow funding and even if you have a good track record and are an established profitable concern looking for expansion capital – “long term equity based investment” may be not only the best but possibly the only source of the money you can attract.

And the list can go on. Whereas compared to a loan…..

If you believe that your company can pay the interest and capital repayments when due, and there is enough acceptable security (and perhaps personal guarantees from Directors), a bank or other loan and/or an overdraft might be the right answer. Minerva will advise on the right funding solution for you and through UWSP’s access to finance programme will try and assist you obtain the funding. We will charge for that service in much the same way we do for equity.

Ultimately, borrowing money at an acceptable rate of interest plus other charges and paying it back as agreed is perceived as a cheaper way of funding your business, and there will be no requirement to have to sell the business at a later date to enable the investor to get a return on his investment.

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