How to Fund Your Startup

When an entrepreneur enters the financial world with an innovative idea, one of the first steps is to decide how to raise capital for the business. To do this, they can use equity, debt, or a combination of both. Depending on the type of startup, certain methods of financing will be more appropriate than others. There are two basic types of funding available to startups – debt financing and equity financing.

So…

What is Debt?

Purchasing a car or using a credit card are forms of debt financing. You are taking a loan from a person or business, and making a pledge to pay it back with interest. Debt financing for your business works in a similar way. As a business owner, you can apply for a business loan from a bank or receive a personal loan from friends, family or other lenders. Generally, there are two types of debt:

  • Long-term Debt – This type of loan is used to finance long-term investments such as buying fixed assets for the company (building, machinery, etc.). It usually involves a large amount money, which is re-paid over a longer period of time.
  • Short-term Debt – This ‘revolving’ debt involves a steady flow of smaller amounts of capital after a specific period of time (annually, half-yearly, etc.). Short-term debt is mostly used to finance the daily operations of the business.

What is Equity?

Equity financing involves investors. You could offer shares of your company to family, friends and other small investors, but equity financing often involves venture capitalists or angel investors. In addition to providing the capital, investors – who are sometimes successful entrepreneurs themselves – can bring their skills and expertise to the businesses they acquire. Thus, partnering with right investors can boost the growth of a startup in a number of ways.

Advantage & Disadvantages of Debt Financing

The advantages of debt financing are numerous. First, the lender usually has no direct control over your business. Once you pay the loan back, your relationship with the financier ends. Next, the interest you pay is tax deductible. Finally, it is easy to forecast expenses because loan payments do not fluctuate.

However, there is a large downside to debt financing since it involves betting on your future ability to pay back the loan. What if your business does not grow as fast or as well as you expected? Debt is an expense and you have to pay expenses on a regular schedule. This could significantly hamper your company’s ability to grow. For startups in their early years, taking money out of the company in the form of loan repayments is undesirable as it dampens the rapid growth that the companies hope to achieve.

When an entrepreneur enters the financial world with an innovative idea, one of the first steps is to decide how to raise capital for the business. To do this, they can use equity, debt, or a combination of both. Depending on the type of startup, certain methods of financing will be more appropriate than others. There are two basic types of funding available to startups – debt financing and equity financing.

So…

What is Debt?

Purchasing a car or using a credit card are forms of debt financing. You are taking a loan from a person or business, and making a pledge to pay it back with interest. Debt financing for your business works in a similar way. As a business owner, you can apply for a business loan from a bank or receive a personal loan from friends, family or other lenders. Generally, there are two types of debt:

  • Long-term Debt – This type of loan is used to finance long-term investments such as buying fixed assets for the company (building, machinery, etc.). It usually involves a large amount money, which is re-paid over a longer period of time.
  • Short-term Debt – This ‘revolving’ debt involves a steady flow of smaller amounts of capital after a specific period of time (annually, half-yearly, etc.). Short-term debt is mostly used to finance the daily operations of the business.

What is Equity?

Equity financing involves investors. You could offer shares of your company to family, friends and other small investors, but equity financing often involves venture capitalists or angel investors. In addition to providing the capital, investors – who are sometimes successful entrepreneurs themselves – can bring their skills and expertise to the businesses they acquire. Thus, partnering with right investors can boost the growth of a startup in a number of ways.

Advantage & Disadvantages of Debt Financing

The advantages of debt financing are numerous. First, the lender usually has no direct control over your business. Once you pay the loan back, your relationship with the financier ends. Next, the interest you pay is tax deductible. Finally, it is easy to forecast expenses because loan payments do not fluctuate.

However, there is a large downside to debt financing since it involves betting on your future ability to pay back the loan. What if your business does not grow as fast or as well as you expected? Debt is an expense and you have to pay expenses on a regular schedule. This could significantly hamper your company’s ability to grow. For startups in their early years, taking money out of the company in the form of loan repayments is undesirable as it dampens the rapid growth that the companies hope to achieve.