Debt or Equity?
Finding debt capital (a loan from a bank) is generally cheaper than equity funding (venture capital from investors ), and it’s definitely quicker and easier to find. Plus the real advantage to debt financing is that it doesn’t dilute your ownership—you don’t have to sell part of your company to get the money. On the other hand, lenders require regular monthly payments of principal and interest regardless of your profitability.
But only about fifteen percent of start-up companies find someone to invest. The chance of a slow-growth, home-based Internet retail or distribution company being financed by an investor is much lower. Which leaves lenders—and lenders shy away from what they call an “undercapitalized” company, one where the owners have too little of their own money at risk. Your investment in your company, after all, is a lender’s best guarantee of your commitment through thick and thin.
So if you finance your company with a loan and you’re successful, everything you make is yours after you pay off the debt. On the other hand, with equity capital you may grow larger or more quickly, but you’ll have to share the wealth and some control with investors.
You probably don’t want to hear this, but you really are better off to struggle through start-up on your own nickel. If you can’t scrape together the money to get started from savings, credit cards, personal credit lines, home equity, and close friends why would anyone trust you with their money?
But lots of other people have started from scratch, you say, how did they do it? Keep reading.
