|Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.|
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
Partner Pros and Cons
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.
Read Other Small Business Financial Articles