How to finance your business venture
Archive article, published in 2021. Its content reflects the context at that time.
When we think about starting a business, we are excited about the product or service we want to offer, what will make it different, how we will grow and how we will build a team. But one essential part of moving forward concerns us, and we often do not know how to approach it: where will the money for the business come from?
In this article, we explain the different options available and their implications.
First, we need to understand the difference between debt and equity. Both bring funding into the business, but they have very different characteristics.
Debt financing, usually through loans, creates a cost for the business in the form of interest, which is generally tax-deductible within certain limits. It also has a predetermined maturity date by which the principal must be repaid. Lenders generally have no control over the company: their interest lies in recovering the principal and earning interest.
Raising money through equity does not require the company to repay investors at any particular time or pay them a return. Although the company may decide to pay dividends, it is not obliged to do so. Another significant difference from debt is that giving shares in exchange for capital gives the investor control, as they become an owner of part of the company.
Neither method is inherently better than the other. The ideal debt–equity combination depends on the company, its sector and its stage of development. If you are an entrepreneur who needs management support, an experienced partner can be very helpful. If you want to remain the sole owner but do not have enough savings to fund the project yourself — often called bootstrapping — you should focus on obtaining a loan, although increasing leverage raises the risk of insolvency.
If you choose debt, you can seek a loan from family and friends, a bank, a debt fund or a crowdfunding platform offering crowdlending. Public funding, such as ICO loans, and public-sector support are also available for entrepreneurs and self-employed professionals; some support may take the form of non-repayable grants. If you want to raise equity for greater flexibility, you can partner with family and friends, seek an angel investor or venture capital fund, or present your project on a crowdfunding platform where many individuals can support it with small contributions.
At Legal Angels, we would be pleased to review your circumstances, analyse the advantages and disadvantages of each option and help you find the approach you consider best suited to your goals.