Two types of business financing

There are two basic types of business financing.

Types of business financing

Debt financing Equity financing
Definition
Borrowing money that is to be repaid over a period of time, usually with interest. Debt financing can be either short-term (full repayment due in less than one year) or long-term (repayment due over more than one year).
Definition
An exchange of money for a share of business ownership.
Key benefit
The lender does not gain an ownership interest in your business and your obligations are limited to repaying the loan.
Key benefit
This form of financing allows you to obtain funds without taking on debt; in other words, without having to repay a specific amount of money at any particular time.
Key challenges
In smaller businesses, personal guarantees are likely to be required on most loans. If you have too much debt, lenders may consider your business to be overextended and risky for further investment. In addition, you may be unable to weather unanticipated business downturns, credit shortages, or an interest rate increase if you have an adjustable-rate loan.
Key challenges
The major disadvantage to equity financing is that you no longer have 100% ownership of your business, and must therefore share some degree of control of the business with additional investors.


Click the Next button to discover five common sources of start-up business funding.