Starting a business isn’t as simple as it sounds. You’ve probably heard the saying, "It takes money to make money." While this isn’t always true for employees, it’s a reality for entrepreneurs. Whether you’re buying real estate, stocking up on inventory, launching marketing campaigns, or hiring staff, you need money. Even if your business is online, you’ll still have to pay for website development, hosting, and other operational costs.
So, where does the money come from? There are many ways to finance a business, but they usually involve either taking on debt or giving up equity.
Debt Financing Your Startup
You’re probably familiar with the concept of debt. But before you commit to any borrowing option, make sure you explore all your financing options. There are many types of business loans, including SBA loans. You can also take out a personal loan, use your home equity, or use personal or business credit cards. You could even borrow money from friends or family, but be aware that this could risk your relationship if your startup doesn’t succeed.
Debt financing has its pros and cons. On the plus side, you keep 100% of your business, you maintain financial and managerial control, you have fast and flexible funding options, and you can deduct the interest. However, debt also has its downsides. It costs you in interest, it can bite into your cash flow, you have to qualify for a loan, and there are consequences if you default.
Equity Financing Your Company
Equity financing is another option. This involves giving up a percentage of your ownership in exchange for capital. Venture capitalists and angel investors are common examples of equity investors. You can also raise money through crowdfunding platforms or from friends or family.
Equity financing also has its pros and cons. The advantages include no burdensome debt payments, partners who bring experience and connections, and less recourse if your business fails. The downsides include loss of future profits, loss of managerial and financial control, and a slow initial fundraising process.
Choosing Between Debt and Equity Financing
When deciding between debt and equity financing, consider the speed and urgency of your need for money, the amount you need, whether you want expertise and connections, whether you’re open to sharing ownership, and your long-term goal for the business.
Self-Financing Your Business
There’s also a third option: financing your business with your own savings and income. This is how my business partner and I financed our company. We had some seed money set aside, but we also picked up side hustles to generate income while we built our business. Eventually, we turned a profit.
Final Thoughts
Starting a business is the hardest thing I’ve ever done, but it’s been absolutely worth it. It’s forced me to grow as a person and opened up new opportunities for me. If you feel that starting a business is your only option for a fulfilling life, I wish you good fortune. Now you just need to find a way to pay for it.
