Should I Raise Money From Investors or Get a Loan?

By Joel Arberman, founder of Prepared to Raise · 17 companies taken public, 30+ private placements prepared · Published November 9, 2026

What each one actually costs

Debt

Interest plus fees, paid on a schedule regardless of how the business is doing, usually with a personal guarantee. An SBA 7(a) loan to a small business commonly carries a rate a few points above prime, over 7 to 25 years depending on use. A conventional bank term loan is similar for a strong borrower. Online lenders and merchant cash advances are far more expensive and should be a last resort. The cost is known, finite and tax-deductible, and when the loan is repaid you still own everything.

Equity

No required payments and no personal guarantee, but you give up a share of every future dollar of profit and of the company's value, forever, plus some control and the obligation to report to investors. If the business grows, equity is the most expensive money you will ever take. If it fails, equity investors lose and you do not owe them. That asymmetry is why equity exists for uncertain outcomes and debt for predictable ones.

The things in between

• Investor loans and notes. Money from private individuals structured as debt, sometimes with a revenue share or a conversion feature. Still a security, still needs the exemption and documents, but no permanent dilution.
• Revenue-based financing. Repaid as a percentage of monthly revenue until a fixed multiple is reached. Flexible, usually expensive, and only available with steady revenue.
• Preferred units with a buyback. Equity that behaves like debt: a preferred return paid from profits, and a right to buy the investors out at a set multiple. The most common structure for service businesses raising from their network; how it works.

A five-question test

1. Can the business make the payments today, from existing cash flow, without the new money working? If yes, debt. If no, equity or a hybrid.
2. Does the use of funds produce predictable cash? Equipment, a second location that mirrors a profitable first one, inventory for known demand: debt. New product, new market, hiring a sales team, a long development cycle: equity.
3. How much, relative to the business? Lenders rarely extend more than a modest multiple of annual cash flow. If you need two or three years of revenue, equity is the realistic route.
4. What does your personal balance sheet look like? Most small business loans require a personal guarantee and often collateral. Owners who cannot or will not sign one are in the equity market.
5. How much will the company be worth in five years if this works? Run the numbers. 25 percent of a company that doubles in value costs far more than the interest on a loan for the same amount. If the honest answer is "about the same as today," the dilution is cheap and the fixed payments are the bigger risk.

The five-year math, with an example

An owner needs $500,000. The business earns $300,000 a year and is reasonably expected to earn $600,000 in five years.

• Loan at roughly 10 percent over 10 years: about $80,000 a year in payments, around $290,000 of total interest, and the owner keeps 100 percent of a company earning $600,000.
• Equity of 25 percent for $500,000: no payments, but investors receive 25 percent of profits, so $150,000 a year by year five and 25 percent of any eventual sale, indefinitely.

In this example the loan is far cheaper if the business can carry $80,000 a year of payments from day one. If it cannot, or the $500,000 is for something that might not work, equity transfers the risk to investors at a high price. Both can be right; the point is to run your own version of the numbers before deciding.

When the bank says no

A declined loan is information, not a verdict. Banks say no for reasons that have nothing to do with the quality of the business: too young, too little collateral, industry concentration, a thin personal credit file. If the business is sound, private investors who know you will often say yes where the bank would not, usually through a note or preferred units rather than common equity. If the business is not sound enough for a bank, be careful that investors are not being asked to take a risk the bank refused.

Doing both

Many raises are a layer of each: a small equity or preferred round from the network that strengthens the balance sheet, followed by a bank or SBA loan that the stronger balance sheet now qualifies for. Investors like it because the loan stretches their money; lenders like it because the owner has outside capital committed. Sequence matters, so plan it with your accountant before you approach either.

If the answer is equity

Then you are selling securities, with the exemption, documents and filings that come with it, even to friends. How to get investors for a small business explains where they come from, and the 90-day preparation plan what to do before you ask. Prepared to Raise prepares equity and investor-loan raises on fixed fees; we do not arrange bank loans and do not find or solicit investors.

Related questions

Is it better to get a loan or investors for a small business?

A loan is cheaper when the business can make the payments from current cash flow and the money produces predictable cash. Investors fit when payments are not yet affordable, the use of funds is uncertain, the amount exceeds what lenders will extend, or the owner cannot give a personal guarantee.

Can I borrow from private investors instead of selling equity?

Yes. A promissory note or an investor loan from individuals is common, but it is still a security in most cases, so the same exemption, documents and filings apply as an equity raise.

Do investors require a personal guarantee?

Equity investors do not. Lenders, including SBA lenders, almost always do for a small business, and some private lenders ask for one as well.

What percentage of my business should I give up for $500,000?

It depends on what the business is worth and what the investors receive. For a profitable service business, 15 to 35 percent is a common range for that amount, often as preferred units with a defined return rather than common equity. See what percentage of my company is fair for a $50,000 investment for the valuation logic.

Where to start

If you lean toward equity, how much should I raise and SAFE, note, loan or LLC units are the next two decisions. If you are still undecided, the 1-minute raise path tool gives a quick read.

This article is general information for founders, not legal, tax or investment advice. Securities rules depend on your facts; confirm your plan with a securities lawyer before you accept money.