Do You Need a Partner or Investor? Pros and Cons of Each

Growing businesses often reach a critical juncture when, in order to get to the next level, they require an infusion of capital. In many cases, financed capital is either not available or it’s not sufficient to meet the expansion needs of the business. That’s when many businesses look outside for capital through an investor or by taking on a partner. Both can be a source of big capital; however, both can also be a source of big headaches. Business owners should carefully consider the pros and cons of each to determine, which, if any, would be the best fit for the business.

First, the Key Differences between a Partner and an Investor

An investor is generally, a person or an entity that puts up a sum of money in return for a stake in the company or a future return, or both. An investor can be anyone (or thing) from a family member, to a bank, to a private investment group, a venture capitalist or a vendor/supplier used by the business.

A partner is someone who can bring both financial and intellectual capital to the table. Generally, when a business owner takes on a partner, a partnership agreement details the financial arrangement as well as the respective roles in the business. From that point forward, business equity and interests are divided between the partners according to the agreement.

Generally, a business would seek an investor rather than a partner when they have an immediate need for capital to expand. A capital infusion from an investor can help purchase new equipment or facilities, undertake a major product launch, or pay down high-interest debt.

A business is more likely to take on a partner when, in addition to gaining access to additional capital, it needs additional expertise or capabilities, and/or the partner can help the business gain access to new markets or customers.

Investor Pros and Cons

Pros

• Unless the investor is a venture capitalist or private equity group, investors generally don’t expect to have a role in the business or involvement in management decisions.
• Capital provided by an investor is considered equity capital, which is not a loan to be repaid. Instead, investors rely on a return on investment which can be realized through profits or the eventual sale of the business.

Cons

• Certain types of investors could expect to receive some control over the business in exchange for their investment, based on the agreement.

Partner Pros and Cons

Pros

• Partners can share responsibilities and the burdens of management
• More partners increase the availability of capital
• Lenders may look at the business more favorably
• A partner can bring an immediate influx of capital, capabilities, and customers

Cons

• Unless it is a limited partnership, investing partners will expect a role in the company or in management decisions.
• The business can become liable for the debts and obligations of the partners.
• A partner can enter into legal agreements the other partner is required to uphold.

Choosing a partner can be much more difficult than choosing an investor. Failed partnerships are among the main reasons why businesses fail. Selecting the right partner must involve a serious evaluation that goes beyond the additional capital he or she can bring. All of the funding, skills and expertise a person brings will be worth nothing if there is no compatibility of work style and business philosophies.

If you just need capital, look to investors. If you really need an influx of human capital along with financial capital, look to a partner. But choose wisely.