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How Start-up Capital Works


Types of Capital

You have two choices when deciding which type of capital funding you want for your company. You can go for debt capital or equity capital.

With debt capital, you'll be getting a loan that must be paid back over a set period of time, with interest and possibly some other fees. You maintain full control of your company, but you also have a hefty tab to pay at the end of the evening. Equity capital is funding provided by people or firms who want to own a part of your company and reap some of the rewards when your large and successful company goes public or is acquired by another larger and even more successful company. So your real question is, do you want to give away part of your company in exchange for the cash you need to make it happen? Or, do you think you'll be able to make the monthly payments of a loan so you maintain full control and ownership?

To determine the type of funding you should go after, ask yourself questions like these:

  • Could my company even qualify for debt financing?
  • Am I willing to lose my house if the company goes under?
  • Will I be able to make the monthly payments to pay off the debt?
  • Will the lender give me more money if I need it?

Or, for equity financing:

  • Would investors even be interested in my idea?
  • Am I really the control freak people say I am? Is that a problem?
  • Am I really okay with someone going through my confidential financial information?
  • Am I going to be able to give investors the information they need?
  • Am I going to have a problem sharing my hard-earned profits?

Once you've mulled over those questions, and are totally confused, remember, you can always make use of more than one funding source. Some of your choices for funding your company include:

  • Personal savings
  • Borrowing from friends and family
  • Getting a loan from a bank
  • Getting a loan through the U.S. Small Business Administration
  • Getting a partner and using his or her personal funds
  • Going through a commercial finance company
  • Going the venture-capital route
  • Lease-based financing
  • and many others that we'll talk about as we go

You will probably be able to get more money from investors than from a loan. So if your business requires a lot of cash up front to grow quickly (as in a high-tech industry), then equity capital may be your best route. Let's wade through the various sources for funding, and go over some of the pluses and minuses of each.