Financing a New Business

¶ … Consultant, I starting a business developing business plan. I'm advice start forming business. I financed I partners. I interested learn intricacies options determine proceed plan.

Dear Mr. Owner:

Business financing is naturally one of the most important concerns of any individual beginning a new enterprise. In general, business owners have two available options: to seek out loans from a variety of available sources or to seek out equity financing from investors. There are advantages and disadvantages to both choices.

Many business owners first seek out loans from friends and family members. This has the advantage of a (usually) low interest rate: however, the cash supply is limited and owners do not always want to create bad blood between themselves and their relatives. Another option is seeking out loans from a bank. "To secure this loan, financial institutions will require several years of financial information on both the business and the entrepreneur. They will want collateral to secure and guarantee a loan" (Hall 2012). Thus, a loan from a bank is not a guaranteed source of revenue and must be paid back with interest. The interest on the loan payments, however, is tax-deductible as a business expense (Deducting business-related interest loan payments, 2014, Nolo).

The advantage of securing a loan from an impersonal source such as a bank, however, is that the bank cannot claim to exercise any oversight over the business, given that it is in no way an 'owner' of the business. And for some types of enterprises, such as LLCs (limited liability corporations), the owner is not personally responsible for the debts incurred by the business. A final, perhaps least desirable option of using debt to finance a business is using credit cards: interest rates can often be prohibitively high, however (Allen 2014). When taking on any type of debt it is important to remember that statistically speaking, most businesses fail rather than succeed.

The other option for securing financing is seeking out investors in the form of equity financing. 'Angel' investors are often sought after: "this affluent individual -- or a group of individuals who pool their research and resources -- provides capital for a business start-up usually in exchange for convertible debt or ownership equity" (Hall 2012). The advantage is that this is an investment, not a loan, so if the business undergoes financial difficulties it does not have to be paid back. The disadvantage is that the investor may claim a certain degree of control over the business. "Angels become very real and serious investors and owners with high expectations looking for solid results" (Hall 2012). For businesses with an attractive idea with little cash, equity financing can be attractive: "you sell partial ownership of your company in exchange for cash. The investors assume all (or most) of the risk -- if the company fails, they lose their money. But if it succeeds, they typically make much greater return on their investment than interest rates. In other words, equity financing is far more expensive if your company is successful, but far less expensive if it isn't" (Allen 2013). Needless to say, the revenue generated from investments in a business is subject to taxation.