Choose a bank loan when the business already makes steady cash to cover repayments and you want to keep ownership. Choose investors when you need more capital than your cash flow can repay and are growing faster than a lender will fund.
That's the short answer to "should I get a business loan or investors?" The longer answer depends on what each one reads in your financial model. A lender looks for cash left over after every repayment, in every year of the loan. An investor looks for growth big enough to make their stake worth many times what they paid. The same business can look strong to one and weak to the other, so it pays to know which test you're sitting.
At a glance
Debt vs equity at a glance
Debt financing means you borrow and repay. Equity financing means you sell part of the company. Most options fall somewhere along that line.
| Option | What you give up | Repayment | What they check first | Fits which business | Typical documents |
|---|---|---|---|---|---|
| Bank loan | Interest, often security or a personal guarantee | Regular payments, usually from the start | Cash flow after repayments, and what backs the loan | Profitable or asset-backed businesses | Business plan, bank-ready model, past accounts and bank statements |
| Venture debt | Interest, plus warrants (a small right to buy shares) | Monthly, often after an interest-only period | Your last equity round and who invested | Venture-backed companies stretching their runway | Model, cap table, board pack and bank statements |
| Revenue-based financing | A share of monthly revenue until a set amount is repaid | Rises and falls with revenue | Recurring revenue and margins | Businesses with steady repeat sales | Revenue history, bank and payment data |
| Angel investor | A share of the company | None. They're paid when you sell or list | The founders and early traction | Pre-seed and seed startups | Pitch deck and model |
| Venture capital | A larger share, often a board seat | None. They're paid when you sell or list | Growth and market size | Fast-growing companies in big markets | Pitch deck, model, cap table and a data room |
Lenders
What a lender reads in your model
A lender's main question is whether you can pay them back, on time, every time. Their upside is the interest. They don't share in your growth, so they care much more about a bad year than a great one. What they read first:
- Cash flow after debt service, year by year for the life of the loan
- The debt service coverage ratio, or DSCR
- Security, like property, equipment or a personal guarantee
- Covenants, the rules the loan sets, and whether any year breaks them
- Your trading history, often two or three years of accounts if you have them
DSCR is the number most lenders start with. It compares the cash you have to the payments you owe.
A DSCR of 1.0x means cash only just covers the payments, with nothing spare. Lenders want a cushion above that, and each one sets its own minimum, so ask yours. A bank-ready financial model shows the DSCR for every year of the loan, not only the average, because the weakest year is the one that breaks a covenant.
Investors
What an investor reads in your model
An equity investor's question is the opposite one. They know some of their companies will fail, so they look for the few that could return the whole fund. A bad year worries them less than a small ceiling. What they read first:
- Growth, and the drivers behind it
- Market size, built up from real customers. See top-down vs bottom-up market sizing
- Unit economics, like what a customer costs to win and what they're worth
- Use of funds, and how far the raise gets you
- Dilution and the exit, which together decide what their share is worth. See how we value a startup
A model built for a lender often looks too cautious to an investor, and a model built for an investor often looks too hopeful to a lender. If you're talking to both, keep one model with clear scenarios, and show each reader the case that answers their question.
Worked example
Worked example: the same business, two routes
A made-up company needs $750,000. It can borrow it over 5 years at 9%, or sell shares to investors at a $3M pre-money valuation. Here's what each route means.
| Business loan | Investors | |
|---|---|---|
| Money raised | $750,000 | $750,000 |
| Founders' ownership after | 100% | 80% ($3M ÷ $3.75M post-money) |
| Monthly cash out | About $15,600 for 60 months | $0 |
| Total cost | About $184,000 of interest | 20% of the company, for good |
| In a bad year | Payments are still due, and a covenant may break | No payments. Investors share the loss |
| If the company later sells for $20M | Founders keep it all, less any debt left | Investors get $4M before any later rounds |
Illustrative only. Real loan terms, fees and valuations vary, and later rounds dilute everyone.
The loan is cheaper if the company does well. The investors are safer if it doesn't. That's the trade in one line, and your model should show both sides of it.
In between
The options in between
Between a bank loan and a share sale sits a range of options. Each one mixes the two in its own way.
- Venture debt. A loan for companies that already have venture investors, often with warrants attached. It stretches runway between equity rounds.
- Revenue-based financing. You repay a share of each month's revenue until a set total is paid. Good months repay faster.
- Merchant cash advance. An advance against future card sales. It's fast, and usually far more expensive than a bank loan once you work out the real rate.
- Convertible notes and SAFEs. Money now that turns into shares at the next round, often at a discount. It's equity in the end, with the price set later.
We've modelled several of these from the lender's side. Our cash advance case study shows what a lender counts when advances don't come back.
Using both
Using both
Many companies use both, in turn. A common pattern is equity first, while the business is young and has no steady cash, then debt once revenue is regular enough to cover repayments. Property and project businesses often use both at once: equity for part of the cost and a loan for the rest.
When you use both, each funder reads the other's terms. A lender checks what investors are owed first if the company is sold. An investor checks the loan's covenants, because a breach can hand control to the lender. Your model should show the loan and the shares together, so both can see the full picture. Our private credit fund case study shows the lender's view.
What to prepare
What to prepare for each
Different readers need different documents. The financial model sits under both.
For a lender
- A bank-ready financial model, with DSCR by year
- A business plan
- A lender deck, short and focused on repayment
- Past accounts and bank statements
For investors
- A financial model with base, upside and downside cases
- A one-page teaser
- A pitch deck built from the model
- A data room for due diligence
We build both kinds. For founders, see the pitch deck and financial model service. For property and fund sponsors who need a lender deck, see the real estate fund model and pitch deck service.
This guide explains the choice. It isn't financial, legal or tax advice. Before you sign a loan or a term sheet, speak to your accountant or a qualified adviser.
Your questions
Questions founders ask
Is it better to get a business loan or an investor?
It depends on your cash flow and how fast you're growing. A loan suits a business that already makes steady cash and wants to keep full ownership. Investors suit a business that needs more money than it can repay, and is growing fast enough to make their stake worth much more later. Many companies use investors first and loans later.
What is the difference between debt and equity financing for a startup?
Debt financing is borrowed money you repay with interest, and you keep all your shares. Equity financing is money from investors in exchange for part of the company, with no repayments. Debt is cheaper if the company does well. Equity is safer if it doesn't, because investors share the loss.
What do banks look for in a business loan application financial model?
Banks look for cash left over after every repayment, in every year of the loan. Expect them to check the debt service coverage ratio (DSCR), the security behind the loan, the covenants and your trading history. Show the DSCR for each year, not only the average, and include a downside case so the bank can see the weakest year.
What is a good DSCR for a business loan?
A DSCR of 1.0x means your cash only just covers the payments, with nothing spare. Lenders want a cushion above that, and each one sets its own minimum depending on the sector and the loan, so ask your lender for theirs. A DSCR of 1.5x means you have $1.50 of cash for every $1 you owe.
Is venture debt better than equity?
Venture debt costs less ownership than equity, but it has to be repaid, usually within a few years. It suits venture-backed companies that want to stretch runway to the next round. It's risky for a company without steady revenue, because repayments continue even if growth slows. It's usually offered alongside or soon after an equity round.
Next step
Tell us who you're asking
Let us know whether you're going to a bank, to investors or to both. We'll build the model to answer the question that reader asks first.
Not sure how much to show? See how many years to forecast.