Question

What are the pros and cons for using venture capital and bank loans as a source of financing a small business?

Answer 1

Venture capital and bank loans are two different sources of funding or financing a small business, though both of these methods have its own pros and cons. There are different pros of venture capital as a source of finance. The first pro is that it is of equity nature and it does not put any liability upon the business if the business fails. The second pro is that it does not require the firm to pay any interests. So, it does not create the risk of liquidity to the business. The third pro is that venture capitalists bring technical expertize as well as guidance to the business so that business can have growth properly. there are few cons also. The first con is that it can affect the controlling authority of the business and control can move out towards the venture capitalists. The second con is that venture capital is not available to all the firms and only high growth potential and small business can get it.

The first pro of bank loan is that it is simple, easy to be applied and less requirement of documentation. The second pro is that total control lies with the small business. The third pro is that it is available to all the viable and profitable projects with convincing project proposals. Though, the cons are requirement of payment of debt either interest or interest and principal both, scope of liquidation if loans are not paid and poor credit rating as a consequence.