Business Loan vs Equity Investment in Ireland

Every day, small and medium enterprises (SMEs) ensure that communities across Ireland remain supplied with essential goods and services. GRID Finance understands the vital contribution made by SMEs – and the pressures their owners constantly experience. In response, we offer a range of financial products specifically designed to help SMEs succeed, whatever their sector.

Some SMEs in Ireland may never require external funding. By good luck or shrewd planning, they have access to enough money whenever it’s needed. However, most businesses will need extra funds from time to time. These may be used to purchase stock, upgrade equipment, expand premises, bypass a cash-flow difficulty, or for any number of other reasons. 

In this article, we’ll contrast two methods of injecting money into a business: by obtaining a standard Business Loan or getting new equity investors on board. At the same time, we’ll also look at another option from GRID Finance designed specifically around the real-world pressures that constantly face SMEs.

Understanding Business Loans

Business loans are one of the most basic commercial financial tools available and are offered by most lenders. In this section, we’ll outline what they are and how they work. 

What is a Business Loan?

As its name suggests, a Business Loan is simply a sum of money borrowed by a business from a bank or other lender. 

Businesses of all sizes borrow and there are countless reasons for doing so. One of the most common is to fuel growth – for example, by using money borrowed to expand premises or buy equipment or vehicles. 

Another reason is to tide a business over when its cash flow is reduced.  

In both of these scenarios, not having access to external funds could seriously affect a business’s ability to grow or even threaten its survival.

Business Loans are generally classed as either ‘secured’ or ‘unsecured’. A secured loan is backed by assets owned by the business, such as property or machinery. A lender can seize these if a borrower defaults. In contrast, an unsecured loan isn’t backed in this way. As the lender is less protected, they will generally charge higher rates of interest for unsecured loans.

Pros and cons of Business Loans

Exploring Equity Investments

Equity Investment is a very different way for a business to raise cash and can have a lasting impact. In this section, we’ll consider if, and when, this might be a worthwhile option. 

What is Equity Investment?

In the most basic terms, Equity Investment means offering an ownership stake (also known as ‘equity’) in a business in exchange for money. As the business grows, investors hope their equity’s value will rise and generate a steady stream of dividends. 

Of course, the value of equity may also decrease. Knowing this, most investors will first examine the current condition of the business’s finances, the leadership team and their future plans for growth. This exercise is known as ‘due diligence’. While raising funds via Equity Investment is more common in start-up and newer companies, it’s an option that any business can consider.   

Pros and cons of Equity Investments

On the face of it, an Equity Investment can be a very attractive financing option for businesses, especially start-ups with few assets. Not only are regular repayments avoided but the investor also shares in the risk of the business underperforming. 

Having new capital injected may also improve the business’s overall credit rating, and some investors may contribute expertise and business contacts.

These advantages are balanced by potential downsides. The most obvious is that ownership of the business will be shared more widely. So too will decision-making powers and profits. 

Setting up a new equity arrangement can also be complex, time-consuming and costly. Legal professionals will need to ensure that everything is structured correctly. 

Finally, more voices at the senior table will increase the possibility of disagreement over how the business is run and its overall strategic direction. 

Comparative analysis: Business Loan vs Equity Investment 

Is one business finance option better than another? There are no definitive answers as both can be suitable, depending on specific requirements and circumstances.  

Key differences between Business Loans and Equity Investment

As methods of raising funds, Business Loans and Equity Investment are radically different. So too is their potential impact on a business. From a financial point of view, having to make regular loan repayments adds extra pressure, regardless of how the business is performing.

Equity Investments don’t require these payments, a scenario which can give the business extra breathing space to grow. 

Similarly, there’s a stark difference in the impact on the business’s ownership profile. Business Loan providers don’t ask for a stake in the business, while equity investors become co-owners. 

The costs of both options also differ. As a Business Loan is generally simple and straightforward to arrange, its set-up costs can be low. On the other hand, Equity Investment requires expert – and often expensive – advice to ensure all the legal steps have been properly followed.  

Scenarios where each option is suitable

As a rule of thumb, a Business Loan is more appropriate for longer-established businesses while Equity Investment tends to be a better option for newer enterprises. 

Until they establish a steady cash flow, new companies may struggle to meet the regular repayments demanded by a Business Loan. At the same time, having access to an equity investor’s professional expertise and credibility can be highly beneficial to start-ups lacking in both.  

In contrast, Business Loans tend to be preferred by longer-established companies with a relatively short-term need for cash. Understandably, they’re also favoured by directors who don’t want to dilute their control. 

For established firms, having a relatively predictable cash flow can make consistent repayments less challenging than they would be for newcomers.  

Financial considerations

Every SME that seeks funding must assess the impact this will have on control of the business, and its finances. 

Let’s examine these considerations in more detail.

Impact on ownership and control

Issues and conflicts relating to ownership and control have undermined many businesses that might have otherwise succeeded. 

Accepting Equity Investment means introducing new long-term influences into the business; this may be a positive step if it unlocks access to industry expertise and a valuable network. However, stresses can be created if the investor has a different long-term vision for the business. 

To avoid or minimise the impact of this, it’s essential to put a robust shareholder agreement in place before transferring any business equity.    

Financial commitment and return expectations

The financial commitment involved when taking out a Business Loan is clear from the outset and won’t change, unless you opt for a variable rate. Lenders usually require that fixed monthly repayments are made on a set date, no matter how the business is actually performing. Generally, the repayment period will range from one to five years, although this can vary.

Equity Investment involves a very different level of commitment. While there’s no repayment obligation, most investors will expect to receive a regular dividend at some point. 

They will also want the value of their shares to increase as the business grows. Because they risk losing their investment, investors also expect a business to grow steadily and may try to intervene if this doesn’t happen. 

How to choose what’s best for your business

At some point, the decision whether to opt for a Business Loan or Equity Finance must be made. In this section, we’ll look at how this can be done – and outline another, more flexible, option offered by GRID Finance. 

Assessing your business’s financial needs

Before opting for a Business Loan or an Equity Investment, a number of factors must be considered. The most obvious is to compare the amount needed with the size of the regular repayments. Will these put a strain on your budget, especially when trade is slow?  

Similarly, can you confidently forecast your revenue over the entire repayment period?

Another important consideration is whether funds are being raised to cover a short-term cash shortage or to enable long-term business growth. If the need is temporary, then a fixed-term Business Loan is probably a far better option than selling a stake in the business.

When to choose GRID Finance products

What if you would prefer a Business Loan but aren’t confident that your business can manage a fixed monthly repayment?

Here, GRID Finance’s Flexible Repayment Loan could be an ideal alternative. Offering up to €500,000, this option doesn’t impose a fixed repayment schedule. Instead, individual repayments vary and are based on business turnover. 

This means they are calculated as a percentage of average weekly sales, automatically lowering when business is slow and increasing when sales improve. So, unlike a standard loan, GRID Finance’s Short-Term Loan doesn’t put the business under pressure if cash reserves are tight.

Application process and requirements

Would the flexibility of a GRID Finance Loan of between €10,000 and €250,000 benefit your business? 

You can apply if your business is registered in the Republic of Ireland, has traded for nine months or more and takes revenue by card machine, or online using a payments processor. 

If you meet these requirements, please follow the steps listed below: 

Steps to apply for a Business Loan

To apply, first set up a new GRID account online here, upload the documents listed below, complete some declarations and submit your application. If you want to borrow more than €250,000, we can discuss your options.

You will need to supply six months of up-to-date bank statements in soft copy format or a read-only Open Banking Connection. You also need a valid tax clearance certificate which can be obtained from Revenue. If you aim to borrow a large amount, you may also be asked for audited financial accounts and management accounts. 

The approval process takes around 48 hours and once approved, funds should be transferred within approximately 24 hours.

Preparing for equity investors

The GRID Verdict on Business Loan vs Equity Investments for Your Business

It’s always better if a business can draw on its own resources when extra money is needed. In reality, however, most businesses will require external funding at some time or other.

While Business Loans are the first-choice option for most SMEs thanks to their simplicity, repayments can add extra financial pressure for a number of years. On the other hand, there is generally no time limit on how long a new shareholder will remain in place and draw dividends. 

By talking to GRID Finance, it’s possible to enjoy all the benefits of our various Business Loan options without imposing a financial straitjacket on your business. 

GRID Finance loans are designed with the realities of Irish SMEs in mind; no single month or year is identical to the next and as your business fortunes flex and evolve, your loan repayments also rise and reduce. 

You keep control of your business while removing a possible source of unnecessary stress. 

Putting it in the simplest terms, a GRID Finance loan can be a clear win-win for virtually any SME.