Pay for assets such as equipment, vehicles, and real estateFund growth by purchasing inventory, hiring employees, financing receivables, and moreBuild a fund for emergency expenses
Each small business has its own way of raising funds as we’ll see below, but most of them use a combination of different funding methods. Early-stage start-ups typically fund their business out of pocket or borrow money from family and friends. Once they have a viable business plan, start-ups can open their doors to obtain loans or invite external investors.
Types of Small Business Capital
There are two main ways to raise capital: equity funding and debt funding. Capitalization can include both equity and debt, although companies typically prefer keeping debt to a minimum.
Equity Funding
Investors are financially secure individuals who buy shares or ownership in your company in exchange for money. In addition to monetary funding, equity investors may be experts in your field and provide valuable business advice. Unfortunately, in this model, you don’t retain full control over your business and may have to make decisions based on your investors’ inputs. In some cases, equity investors may also be entitled to a portion of profits. The benefit is that you don’t have any monthly repayments and no high interest rates to worry about. You also benefit from the investors’ business experience and solid advice, especially if you’re new in your industry.
Debt Funding
Debt is a loan issued to your company. You retain all shares of the company, but you have to pay back the money loaned to you, along with interest. However, regular and timely repayment of the loan can build business credit, which will enable you to take bigger loans in the future, if required. Moreover, you can also deduct interest payments on your business income tax return.
Where To Find Start-Up Capital for Your Small Business
Finding the start-up capital for your small business begins with identifying your business goals. Where do you want to be in the next few months and years? What are your financial goals and predictions? Outlining these goals can help you find the right options to raise capital. For example, ask yourself if your business needs quick cash and control over how to spend it, or if it would be better to get some advice on how to get the most bang for your buck. If you need money and control, you can look at loans, while if you’re okay with giving away a part of your ownership in exchange for funds and guidance, equity funding may be the right option for you. Once you’ve figured that out, you can start applying for loans or open your company to investments.
