You need money to make money, which is the basic of financing a business. Some business require a lot more cash than the others. A Electronic shop may need thousands of dollars to build a shop and fund an inventory of the shop to sell. Even a laptop service or electronic service needs to spend some cash to purchase equipment and supplies.
Even many of the small business can be started with minimal investment. However, if you hope to expand to include multiple locations, more employees, and more various services, it will be essential that you have enough ready capital for investment. The sources and the uses of that money have to be as carefully managed as the rest of the business.
If you will be using someone else’s money. For example money from bank, investor, or government agency. You will need to be just as sure of your plan and fully understand the risks of borrowing that capitol.
Equity financing is a kind of investment in the ownership of the company. Equity can come from your own resources, from family, relatives, friends, employees, and customers, or from outside investors, including venture capitalists who seek to buy into businesses that have the potential for growth. Equity investors are generally given a portion of ownership (and control) of the company; looking at it from the point of view of the founder, accepting equity financing from others reduces the percentage of the company that you own and control.
Debt financing is a kind of loan, a liability to the company (and, depending on the form of the business, also to the owner). Sources include banks, commercial lenders, and government agencies, including the Small Business Administration. Loans can be used for ongoing operations, for the purchase of equipment, and for short-term uses such as inventory.
Outside investors will usually be very interested in determining and assessing your company’s debt to equity ratio. That formula compares the money you have borrowed, or plan to borrow, to the amount of your own money you have invested in the business. The more money the owner and partners or shareholders have put into the business, the more comfortable an outside lender is likely to be with a request for a loan.
Think of the parallel in buying a home. Most lenders are much more willing to issue a mortgage to a borrower who puts a substantial down payment into the home. The theory is that an owner who is risking some of his or her own money is a more dedicated and trustworthy borrower than someone who is working entirely with other people’s money.