One of the main issues in starting a business is raising capital. Forming a business can be very costly, and many financial advisors suggest simply acquiring an existing business. Building/modifying facilities, developing an inventory, hiring staff, and the myriad other components that go into starting a new business can be both challenging and expensive. It is essential to have a clear and viable plan for raising capital.
If you are planning a business start-up, absent ready capital of your own, you will need to find financing. The two most conventional avenues for raising capital are debt financing and equity financing.
Debt Financing
Debt financing simply means that you take out a business loan with a bank or other entity. Assuming your credit is solid, this may be a good option. Keep in mind that incurring debt at the outset of a business start-up will significantly reduce any potential for profit, at least for the first few years.
Equity Financing
This alternative involves relinquishing a degree of ownership in the company to investors. They front the capital you need in exchange for share of the profits. How many investors you will bring on is guided by the amount of capital you need, as well as by how much ownership in the business you want to keep.
Other Options
Many other options can be used to help you with your business start-up. Among these are:
- Borrowing from a friend or relative
- Taking on a partner
- Taking out a loan on property or other assets you own
The rule of thumb is, the less conventional the method of financing a business, the more risky it will tend to be.
