How to Finance a Business: External Financing Options Available for Entrepreneurs — Unless you’re planning to use your own savings to entirely fund your business, you need to find ways to raise capital from external sources. There are many financing options and different factors to consider getting funding a business towards business success.
Borrowing from your relatives or friends, getting a loan from a bank, finding private investors, seeking out venture capital firms, getting assistance from a microlending group – there are many ways and sources of capital that the entrepreneur can turn to, but they all basically fall into two types of financing: equity financing and debt financing.
Debt vs. Equity
Equity financing is a way for a business to obtain money from an investor in exchange for shares of its stock or partial ownership of the business. “It is zero cost to the entrepreneur. You use capital but not your money; you sell your business idea.
With equity financing, the investor gets paid when the business makes a profit. Thus, to sell your business idea to potential investor, you need to show how their money will earn in your business.
In debt financing, you take out a loan from a creditor o lender with specific payment terms. The loan has to be paid whether or not the business is profitable. With equity financing, however, the entrepreneur is not obliged to pay off his investors should the business fail. It’s no surprise that many investors take an active participation on how the company they invested in is managed. In equity financing, control and ownership of the business is shared, at times even relinquished. When it comes to loans, once the debt is settled, the lender-borrower relationship ends. The lender also does now have any say on how you should run the business.
Source: Entrepreneur magazine