Every year, thousands of people start companies. While their businesses may be different, all of these people have one thing in common: they all had to raise money to finance their company — to get the business off the ground and to cover corporate expenses.
Funding your business is one of the first, and most important, financial choices most business owners make. How you choose to fund your business could affect how you structure and run your business.
Unless your business has the balance sheet of Apple, eventually you will probably need access to capital through business financing. In fact, even many large-cap companies routinely seek capital infusions to meet short-term obligations. For small businesses, finding the right funding model is vitally important. Take money from the wrong source and you may lose part of your company or find yourself locked into repayment terms that impair your growth for many years into the future.
The very first step of exploring ways to finance a business is planning how to do so. All new businesses, from one-person online shops to multi-employee large corporations, need to begin with a clearly drafted, thorough business plan.
The reality is that your business is not going to get funding from either a lender or investor unless you have a business plan to show to prospective lenders or investors. Prospective lenders or investors will need to see that they will be paid back. Investors will need to see that the capital they sunk into your business will grow over time.
The basics — Debt vs. Equity
There are two basic ways to finance a small business: debt and equity.
- Debt — a loan or line of credit that provides you a set amount of money that has to be repaid within a period of time. Most loans are secured by assets, which means that the lender can take the assets away if you don’t pay. A loan can also be unsecured, with no specific asset securing the loan.
- Equity — selling a part of your business (known as selling an equity stake). In this case, you don’t usually have to pay back the investment because the new owner of the equity gets all benefits, voting rights, and cash flow associated with that equity stake.
Regardless of the product name, all financing solutions consist of either debt, equity, or a hybrid combination of both. Keep in mind that there are no “good” or “bad” solutions. The best solution for you depends on your specific circumstances and requirements.
