Whenever entrepreneurs want to secure funding for their following big projects, they think of two standard options: private lending and Venture capital. Both options have their advantages and shortcomings. There is a need to make a comparative analysis of Venture Capital and Private lending before you decide what option is better than another. So, if you are wondering what option will work for you, this comparative analysis is here to guide you.
But before I start comparing these two funding options, you must know what they are. Let’s get started.
What is Private Lending?
You may be familiar with this financial option, where you lend money from individual or non-bank entities. For example, you lend money to your friends and family members. You can also do private lending on online platforms that connect borrowers with investors. You borrow money in exchange for interest payments. Other renowned names of private lending are peer-to-peer lending and private loans.
What is Venture Capital?
Venture capital is a type of investment made by professional investors of venture capital firms. This investment is usually made in small businesses and startups in exchange for ownership stakes in equipment. This kind of funding is typically provided to a potential company that is planning to scale at an exponential rate.
Comparative Analysis- Venture Capital vs Private Lending
So, you have a clear picture of venture capital and private lending. It’s time to quickly compare both options to understand what kind of option is deemed suitable for your needs. These are as follow:
- Source of Funds
- Purpose of funding
- Ownership and control
- Risk and Reward
- Speed of funding
- Eligibility Criteria
Source of Funds
The significant difference between both types of funding is the source of funds.
In the case of private lending, the money comes from individual investors or non-bank entities. A borrower can get a loan from their family or friends. These days, the popular choice of private funding is online platforms that quickly connect investors and borrowers.
As far as Venture capital is concerned, money comes from venture capital firms or professional investors. Venture capital firms have financial resources from wealthy individuals and institutional investors. These firms usually fund startups and small businesses that have some growth potential.
Purpose of Funding
Private loans can be used for many different purposes. For example, you can borrow money for expenses or debt consolidation. Borrowers have the freedom and flexibility to use the funds as they need.
On the other hand, when a startup or small business gets funds through a venture capital option, these funds should be used only for business expansion, scaling operations, and product development. Usually, this investment is focused on business growth.
Ownership and Control
Borrowers retain full ownership and control of their businesses or projects when they opt for private lending. The lenders are primarily interested in receiving interest payments.Venture capitalists usually need equity in the business in exchange for funding. This means they become partial owners and may have a say in company decisions.
Risk and Reward
When you compare the risk factors of both options, you realize that private loans carry less risk. A borrower doesn’t need to give up equity in the business. If he fails to make the repayment, it affects personal relationships. However, interest rates are usually high in private lending.
Conversely, entrepreneurs bear high risk in venture capital because they need to give equity.
Speed of Funding
Private funding is available quickly, especially when you opt for online platforms. The approval process of private lending is faster than venture capital funds. You must go through a lengthy method in case you need capital for your startup. Be ready to wait several months before you can close a deal.
Private lending options are available to many borrowers regardless of their business situation or credit score. On the other hand, venture capital is funding only available to those businesses or entrepreneurs with high-growth companies or ideas.
Private lending is a good idea if you are looking for quick funding for your business. It might have a high-interest rate, but you won’t have to wait months to get the funds. However, the best option is venture capital when you have a potential startup idea where you need substantial investment and expertise. You might give equity to investors, but you can reap high rewards just when your business becomes successful. Consider your situation and dig deep into the comparative analysis of Private lending vs. Venture capital to pick an option that aligns best with your objectives.