Debt, Equity and the Competition Between the Two
Debt Vs. Equity
There are two types of financing available to start and grow businesses: equity and debt. Debt is a familiar concept to everyone. You borrow other people's money and pay it back. Equity, on the other hand, is ownership - an investment in the business by the owners of the company. Most small businesses are financed with a combination of both debt and equity. The more money owners have invested in their business, the easier it is to attract financing.
Generally, the ability to obtain financing will be based on: the strength of the business idea, a complete and comprehensive business plan, collateral, down payment (equity), clean personal credit history and positive financial net worth, management ability and sufficient cash flow to meet expenses and repay the debt.
Equity financing requires that you sell an ownership interest in the business in exchange for capital. This can be your money or other people's money. Investors own a part of your company represented by shares of stock or a partnership interest. The most basic hurdle to equity financing is finding investors who are willing to buy into your business. Family and friends are a common source of equity financing for start up businesses. The amount of equity financing that you undertake also depends upon your willingness to share management control. By selling equity interests in your business, you potentially sacrifice some of your autonomy and management rights.