Most entrepreneurs and start-ups must decide how to fund their business when deciding to launch it. There are several options for funding, so choosing the best one is crucial.
Determining if the company will be a start-up or a small business is necessary before thinking about the source of funding. Although these terms may appear to be the same, they are not.
A start-up is a business or initiative that has been founded by one or more entrepreneurs in order to create a distinctive product and promote it to a rapidly expanding customer base while a small business's main objective is to turn a profit; it is not necessary for them to create new or distinctive products in order to expand.
A a start-up would be expecting to get significant funding right away. A small business would look for business loans to meet their funding goals.
It is obvious from looking at these two types of businesses that they require distinct funding options. Knowing and understanding this would determine the funding approach.
There are different funding options available, but we will look at the two most common ones.
Debt Financing – This entails taking out a loan that must be repaid with interest. Start-ups with the ability to show they have the potential to be profitable and repay debts can choose this option.
Equity Financing –This involves selling shares or stocks in the business in order to raise capital. Before looking for outside equity from sources like angel investors, venture capitalists, institutional and corporate investors, a small business owner may need to put up around 25% to 50% of the initial money. A vast majority of small businesses choose equity funding.
Debt financing has the advantage that after the loan is fully repaid, lenders have no further rights on the company, whereas equity financing gives investors and shareholders a long-term participation in the company's ownership and management.
In addition, a business owner has the option of combining debt and equity financing. By doing this, the benefits, and drawbacks of relying only on one source for funding are balanced. However, you must approach this carefully and with the aid of a financial adviser.
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