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Three types of funding
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In this article we will talk about three main sources of funding; debt, equity and grants
It is important to understand that not all money is the same. These sources of money fall into different categories of financial funds. The three main types of funding are debt, equity, and grants. Which funding is best for you and your small business? Let us take a deeper look at each one to keep you informed and ready to take your idea to the next level.
Debt
Debt is when you owe someone or something money. A debt is created when a person or financial institution agrees to lend money to you in exchange for you paying them back the entire amount plus some interest. Debt is borrowed money and usually comes in the form of a loan.
You can get loans from many places. You can get a loan at banks, credit unions, or other financial institutions. You can also get loans from the government. You can also get loans from friends or family. There are many different types of loans. There are loans that require monthly payments. There are loans that require “interest-only” payments with the principal balance due at the end of the loan. Some loans will require security. For example, a loan may require you to use your house as collateral – that means if you don’t pay back the loan, then the lender gets your house so they can sell it to cover the cost of the loan.
You don’t need to know what type of loan you need right now. A loan officer can help you choose the best type of loan for your business. However, it is important that you understand all the terms of the loans. Make sure you know how to repay the loan and what will happen if you don’t.
Most small businesses are funded by loans. The main advantage to loans is that you don’t give up any ownership of your business. The business is all yours; however, so is the debt. The disadvantages to a loan are that you have to pay interest and someone or something else may have claim on some of your assets until you pay off the loan.
Equity
Equity is the value of ownership in property or in a business. For example, the difference between the market value of your house and the amount you still owe on your mortgage is home equity. In other words, home equity is the amount of your house that you actually own.
Equity financing is trading a percentage of ownership in the business for a specific amount of money. This form of financing allows a business to receive the funds needed without taking on additional debt. If you have ever watched ABC’s TV program “Shark Tank,” then you have seen business owners trying to get equity financing.
Equity financing can come from many different places. The first source is obviously you. Other investors will want to see a new business owner investing their own money to show they are willing to share the risks. Equity financing can come from friends or family. It can also come from private investors sometimes known as “Angel Investors”. They are individuals or organizations that invest occasionally, but they usually have another source for income. A final source for equity financing is professional investors known as “venture capitalists”. These individuals invest in new businesses all the time and their income is based on their investments.
The main advantages of equity financing are that you are not in debt and the funds are available quickly. Also, no one has claim on your business or its assets. However, a significant disadvantage is the loss of ownership. You lose some control over your company. The loss of ownership will vary depending on the type of equity financing you get. The contractual obligations will also vary with the different types. Equity financing can also be hard to find and it is usually a one-time only source for money.
Grants are basically free money.
Grants
Grants are basically free money. They are funds given by a government entity, foundation or business to a person or business. Most grants are made to fund a specific project, such as a person who wants to open their own business. Billions of dollars each year are given away as grants.
The advantage of a grant is that it truly is a gift. You do not have to pay it back and you do not have to exchange ownership to get it. The disadvantage is that the grant money must be used according to the agreement or guidelines of the grant. Also, grants are extremely difficult to get. Everyone wants free money.
Still, this funding opportunity should not be overlooked! After all, someone has to receive the grant money, right? Available grants can be found on www.grants.gov. Also, there are many local government or business grants available. Talk to business owners in your area and check your local government websites for opportunities.
Knowing what tools and weapons you have in your arsenal is incredibly powering…
Debt, Equity, and Grants. Looking for funding can be daunting at times, it is a rather big area to search through and find what it the best for you. Knowing what tools and weapons you have in your arsenal is incredibly powering when it comes to finding funding. This basic run down of the three types of funding will be helpful for any entrepreneur weighing the pros and cons and trying to navigate this space. Research what you feel is best for you, look at your business and make informed, data-backed choices.