Starting a business can be an expensive undertaking and making sure you have the start-up capital you need to succeed is one of the most important factors in determining if your business survives. Most business failures are due to not having the proper start-up funding to survive the challenges of the business environment. You have a wide range of choices when deciding how to acquire this start-up capital and all of these options are based on either equity or debt.
When deciding on the amount of small business funding you’ll need for your business, there are a number of things you’ll have to take into account. Any business has a list of monthly expenses that need to be paid from this start-up funding and knowing what these will be is the first step in determining how much funding you’ll need for the business. These expenses can include rent, taxes, medical coverage, advertising, professional services like legal and accounting as well as salaries for you and your employees. Most experts agree that you should have at least a full year’s expenses ready before starting your business to allow it time to develop the cash flow required to keep it going on its own.
How Debt Funding Works
Most small businesses start by using personal funds or money borrowed from a traditional lender. This form of start-up funding is called debt financing because you are essentially creating debt by using these funds for your business. The money you borrow will need to be paid back over time to the lender with interest. The advantage of this type of funding is that it keeps your business independent and under your control. The lenders will provide the funding without any material interest in your business. They simply want to earn an interest on the money loaned to you and receive their payments on time. This type of debt funding can come from a variety of sources that may include personal savings, friends and family, silent financial partners, and loans from banks or government agencies like the Small Business Administration. If you decide to use debt financing, be sure the business is profitable enough to allow you to make the loan payments on time.
When to Consider Equity Funding
The other type of small business funding is called equity funding. With this type of funding you are accepting an infusion of money from investors that now own an interest in your business. You aren’t required to pay these funds back, but also no longer own the entire business yourself. These equity partners are willing to invest in certain businesses that they think will do well in the hopes of making their investments back and more from the profits of the business if it’s successful. Venture capitalists are a good example of this type of funding although the money can come from a variety of sources. Sometimes a family friend or silent partner will also negotiate this type of equity investment rather than loaning the money so they can share in your success. The thing to remember with equity funding is that accepting this type of funding gives you less control over your business as you now have additional partners involved. Equity funding is the best type of start-up capital to use for a fast growing business because you always have the option of asking the equity partners for more funds as the company expands.