At some point, early on in your business’ lifecycle, you will likely need cash exceeding what your business is able to generate.
This financing will likely come from you, or from a few close friends and family. With the growth of your business, you may notice that your financing options have broadened – outside investors may recognize your business as an investment opportunity, or you may be able to borrow money for the business on its own credit.
The two most common ways corporations raise capital are issuing equity (e.g. shares) and incurring debt (e.g. borrowing money through a bank loan or loans made to the business by shareholders). Debt investors look for lower, safer returns and regular interest payments, while equity investors are generally willing to accept more risk and the possibility of waiting for a long time before their investment pays out for higher returns. Usually, founders make most of their initial capital contributions as shareholder loans, with a comparatively minor amount invested as equity.
It is recommended that you consult your professional advisors regarding any financial transactions to ensure you are raising money efficiently and legally. As a new business owner, you will want to be aware of all of the financing options available to you, and you will also need to know the risks associated with each.