A small business needs cash infusions in each and every phase of its life. Capital will be required either at the start of a business or to grow it. For that reason it is vital for a small business entrepreneur to look at and evaluate his/her options as well as the nature of capital needed before taking the final call.
An entrepreneur can raise capital in two main ways, either equity or debt. Under the equity method, an owner has to give a share of his/her business to the investor in return for cash or capital invested. Using equity, a business owner does not repay the money. However, he/she will have to share controlling power of the company with the investor in accordance with the capital invested.
On the other hand, the debt method simply puts the business owner under obligation to repay the borrowed capital along with the applicable interest within the agreed upon time. Though the business owner does not have to give controlling power to the lender under the debt method, there is a risk of losing collateral in case the business fails to pay the borrowed sum.
Here are some of the methods used to source capital through the equity method.
- Bootstrapping – Sourcing capital through bootstrapping means that the business owner invests the operating revenues again into the business instead of seeking cash outside. The biggest benefit of this method is that an entrepreneur will not lose any controlling share of the company and would not be dependent on outside lenders.
- Cloud Funding – some online platforms have emerged that allow entrepreneurs to share their ideas with potential investors online. If an idea is a hit among investors, then a business can easily raise funds from multiple investors at a single time.
- Venture Capital – Venture Capital firms represent those investors who are willing to invest larger sums into a business. However, these firms look to acquire a significant portion of the business or controlling interest in return.