The success or failure of any business usually depends on the balance between risks, opportunities, and money. From huge capital requirements to staff management, location, and other planning costs, the whole process of starting and managing a business becomes an emotional rollercoaster. Most new business owners have realized that bringing in private investors can significantly improve the odds of succeeding in their business operations.
Private investors are a brilliant source of finance and can have tremendous benefits to a business. However, they also come with their fair share of disadvantages, such as putting more pressure on an already overwhelmed business owner. It is essential to understand that the primary focus of private investors is the returns on their investments and not so much on the business’s success. Below are the pros and cons of incorporating private investors into your business:
Pros
Large amounts of funding: Private investors as a financing method have the potential of bringing in huge amounts of funding. Such funding can be very beneficial to struggling businesses and start-ups. Private investors take away much of the hassle involved in raising money for starting a business or supporting a stressed company.
It is not a loan: Funding obtained through private investment is not classified as a loan. This translates to fewer worries, no upfront payments, and no deadlines. However, this form of financing is not based on credit ratings because private investors are usually more risk-averse than other conventional lenders.
You get to choose your investors: Apart from financial assistance, a struggling company can also make good use of the investor’s expertise to steer the business towards success. The firm has the freedom to choose which investors they bring onboard.
Cons
Hindering the decision-making process: Private investors can slow the decision-making process of the business they are investing in. Sometimes, their interests or motivation do not align with the interests of the business owner. The investors are often more focused on their private investment and not the growth of the business.
Dilution in the company: A company’s shareholders must accept the dilution of their shareholding when a new investor is introduced to the business. This also affects the shareholders’ control of the decision-making process in the company. This loss of control can translate to a loss of essential elements that define the company.
It reduces the business owner’s share of earnings: Besides controlling the company’s operations, investors expect to get a share of the business profits. This is the primary reason why most investors risk investing their money in start-up companies. This limits the business owner’s upside potential if the business takes off.
Takeaway
Bringing in private investors can help alleviate most cash issues that threaten the success of a company. However, working with them is not all roses. There are several disadvantages that a business owner should consider, such as giving away partial ownership of the business to the investors.
