How To Obtain Funds To Start Up Your Small Business
If you are starting a new business, raising capital to start and develop your company is one of the biggest challenges you will face in your initial years. There are many choices for obtaining capital for your business, but at a basic level the choice involves only two options. Raising debt or equity for your company are the two options available that you can choose from. Deciding to choose the proper allocation can determine the success of your business.
More likely than not, you will raise money for your company through the combination of both debt and equity financing. Any time that you offer an ownership interest in a company in exchange for an investment of time or money, you are selling equity. This includes the contribution that you are making into your company. Since you are taking an equity share of your business, this is considered to be an equity investment. If you decide to sell an interest to a third party in your business, this is also considered to be an equity investment. An equity interest is partial ownership in exchange of capital. As such, one way to obtain funds to start up your small business is through offering a person an equity interest in the business.
Another way to obtain financing for your company is through borrowing money. Borrowing money is also known as debt financing. Debt financing includes borrowing money from a bank, from relatives, or even from a government sponsored organization. The amount of interest that is charged on this debt is dependent on many different factors. This includes the credit history of the small business, the prospects from the business and the regularity of the revenue source they operate with, and the financial capabilities of the business. Either which way, any time that you actually borrow money from someone then you are obtaining debt financing. The difficulty with obtaining debt equity is that you will have to provide a regular repayment of the loan as stipulated within your loan agreement. These stipulations may be quite onerous if you are unable to meet them.
What goes into the decision making progress of whether to obtain debt or equity financing to start your small business is very much dependent on your unique situation. Some businesses are able to do better if they are raising capital through debt, while others are able to do so with equity financing. Equity financing sometimes is the only option for companies that are unable to obtain a loan from a business.
Obtaining the funds to operate or expand your business is never all that easy to accomplish. Sometimes the determination of the most efficient source of capital is limited to the options ahead of you. But explore the different types of options available to your business while you are in the critical early period. Debt often hinders the long-term success of your business; though what you lose by offering equity financing may be incredibly. Tread carefully when you attempt to raise money for your business.