Should I take on an investor or consider a high-interest loan?

By Ryan Himmel

Opinions expressed by Entrepreneur contributors are their own.

Our current operation limits the volume we can produce. To implement the necessary changes, we would need about $30K. We have an interested investor who wants partial ownership of our company. We currently don't have any competition.
Congratulations on your success on finding a niche business and executing it well. It's also nice to hear that you are making a business from your culinary ties to your Cuban heritage.

Well, the good news is that you have options, the bad news is that there are a lot of factors to consider. Whenever a client is in a similar situation, I always advise the client to write out all of their options while also detailing the pros and cons of each option.

After reviewing your question, I will say that you would be putting yourself in a very tough situation should you accept a loan with 100 percent interest. I'll explain why as I examine each option below as well as include another option you may not have already considered.

Option 1: Forming a Partnership

Forming a partnership can be a fantastic move but can also turn into a nightmare. To figure out how to proceed, you need to ask yourself some questions:

What is your relationship with this potential partner?

If the potential partner is family or even a friend, sometimes those partnerships can end up messy and ruin your personal relationships. So, be aware of that.

What skills or experience does this potential partner bring to the table?

Is this potential partner going to be active or passive?

Do they possess any skills, experience or have connections that can help you grow your business?

If the answer is yes to these questions, then theoretically they will be bringing more than just capital to the table which can go a long way.

A lot of entrepreneurs are hesitant in giving up some equity and in some instances rightfully so. But, if you will be getting more than just capital for forming a partnership with this person then it can be worthwhile.

Also, keep in mind that you can offer a combination off ownership and percentage of sales when negotiating with this partner should they want more ownership than you are willing to give up.

Option 2: Loan From Individual with 100 Percent Interest

Getting the money so you can expand is a great thing but it has to be at the right price. A $30K loan with 100 percent interest is WAY too expensive. I would definitely steer clear of this offer as the risk is WAY too high should the business not work out as you envision.

Option 3: Loan From Bank or Special Program

Have you tried to apply for a loan through a bank (either community or regional)? Many banks are still anxious to attract new business customers and in many cases currently have special lending programs at very attractive terms and rates.

If you don't have a personal banker, you should request one. In working with your bank, be as forthcoming as possible regarding your history and your needs. Your banker, in turn, will tell you exactly the information he or she needs to present your "best case" to the bank's credit committee.

Be sure to provide no more and no less than what is specifically requested. The banker may advise you that in order to obtain a loan you need to increase operating cash flow in the business.

Also, your local bank is your point of contact for federal Small Business Administration (SBA) and similar state programs. It's certainly to your benefit to ask about special SBA programs for designated urban areas that you may be eligible for.

So, in summary, you need to review the pros and cons of each option but be aware of the risk you would put yourself in should you take a loan with 100 percent interest.

Good luck to you with your endeavor!
Ryan Himmel

Head of Financial Partnerships, Xero Americas

Ryan Himmel is a CPA and financial technology executive who has dedicated over a decade of his work toward providing solutions to help accountants and small-business owners better run their firms. Himmel currently leads financial partnerships in the Americas for Xero.

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