Owning and operating a startup is one of the most challenging, and rewarding things you will ever do. Sometimes, the first hurdle is financing to either launch or expand your business. Fortunately, if you are unable to finance it yourself, you have many funding options available to you.
Financing – Debt vs Equity
As many options as there are, they all fall under one of two different categories: debt financing or equity financing. Both have their advantages and disadvantages. Here is a breakdown of what those are.
Debt Financing
Advantages
- you stay on as the business owner
- there is no obligation once repayments end
- cash is available quickly
- interest collected is tax deductible
- there are both short and long-term options
Disadvantages
- small businesses have few opportunities
- repayments must include interest
- collateral is usually required
Equity Financing
Advantages
- there are no repayments required
- investors available to give you advice and share expertise
- investors in no hurry for investment return
- there is more cashflow available
- funding is often available if you can't get a bank loan
Disadvantages
- you must forfeit part of your business and revenue
- investor payments go on indefinitely
- investors will have ongoing input into decisions
Sources of Financing
Debt Financing
As for sources of funding, there are far fewer choices with debt funding compared to equity funding. For example, debt funding is available primarily through banks, credit unions, and building societies. The funding from these sources may be in the form of a business loan or line of credit. Other forms include equipment leases, asset financing, overdraft services, and invoice financing to name a few.
Equity Financing
Sources of equity financing are plentiful and include the following options:
Crowdfunding
This method of funding involves asking several people to either invest or donate money to your project or concept. It is a common, and simple way to raise money and is often used to generate financial support for worthy causes.
Private Investors
Often known as Angel Investors, these are investors who contribute funds to your business for a portion of your equity and profits. These investors also provide you with valuable insight and advice.
Stock Market
Known as an IPO (initial public offering), putting your business on the stock market involves the public offering of shares to help you raise capital funding. This is probably the one option that has the most risk. It is also the most expensive and complicated of the options, however, it is still an option to consider.
Family or Friends
Sometimes you have to include family or friends in your business plans. This can be done by setting up a partnership or by selling shares in your business to them in exchange for their financial support.
Self-Funding
This is what you would do if you have enough savings or other equity available to finance the startup or what you intend to do with it. Self-funding also helps you if you are seeking additional financial support from investors or lenders.
Venture Capitalists
Larger corporations that invest massive amounts of capital into startups are known as venture capitalists. Your business has to have the potential for both huge growth and profits to attract this kind of investment. Venture capitalists will take a majority share of your business and provide management or industry expertise and advice.
Government Grants
Depending on where you live, you may have access to either state or federal government grants. There are many available provided your business plans meet the specific criteria. Each grant is different, and you may qualify for grants to:
- do research and development
- expand
- innovate
- export
Action Coach Business Coaching for Financing Advice
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Conclusion
If you are about to launch a startup or have opportunities that will help yours grow and generate more revenue, you may require business financing. Fortunately, there are several funding options available. You can try debt financing by visiting a bank or other lender. If that doesn't produce the results you were hoping for, you can seek equity financing.
Equity financing comes in many different forms but each helps you to raise the capital you require to finance your business plans. The easiest way to do this is by either self-financing through your savings or approaching family and friends for help. Or you could apply for grants, seek private investors, or try your luck at crowdfunding. There are many ways to fund your startup. You just have to check them out.