Running a small business comes with many challenges, but just getting it started may be the hardest one. Small businesses are rarely launched by the wealthy; instead, they are the creation of single entrepreneurs who have nothing but a unique idea. That creates the need to secure financing for everything from supplies to office space. The two common forms of funding that small businesses acquire to get off the ground are debt and equity financing. Both have their advantages and disadvantages, but they each can put a small business in business.
Financial institutions are the most widely-used sources for financing small businesses. Known as debt financing, banks offer loans and lines of credit with interest and repayment plans to those that meet their requirements. In doing so, a bank will have access to the company’s cash flow, along with collateral and assets, including those of the owner. Retrieving assistance from banks for a small business takes a well crafted business plan and transparent finances.
One alternative to receiving funding from a bank is securing financing from investors. This is called equity financing since investors receive an equity ownership stake for the money they contribute. For entrepreneurs, there are plenty of investors to choose from including friends and family; private investors, known as angel investors; and professional investors, or venture capitalists. With investors, there are less hoops to jump through than with banks and there is a better chance of receiving a larger figure of financing. However, small business owners have to be prepared to share control, or relinquish it if things go poorly.
