Whenever one has a commercial idea ( business idea), funding for that particular idea is what appears predominantly in everyone’s mind.
“How do I get funded for this?” Many entrepreneurs ask themselves.
Let’s narrowly dive on how one can fund their business/idea.
There are only 2 ways to fund your business:
- Using your own money or
- Borrowing.
Every business founder has to have their own choice.
Using your own money is simpler and this short blog article will focus on borrowing.
There are 2 types of borrowing( financing) which are DEBT or EQUITY.
DEBT involves borrowing a fixed sum from a lender, which is then paid back with interest. EQUITY is the sale of a percentage of the business to an investor, in exchange for capital.
In other words DEBT Financing goes for a loan especially in traditional financial institutions like banks or microfinance institutions whereas EQUITY financing goes for an investment from individual investors or investment firms like Angel groups, Venture Capitalists, Private Equity firms...among many others.
Should your business go for debt or equity?
It depends on the nature of your business.
Let's you're a young business ( an idea business). No revenues yet but with plenty of potential. How should you fund your business?
Debt? No No No.
Why?
You can't make interest payments with ideas. Ideas take unavoidably longer time than expected to materialize thus generating income.
As an idea business founder, don't go to classical financial institutions looking for a loan. You will be creating a lot of trouble for yourself by spending too much time dealing with such institutions and frankly enough, their target clients are not idea business founders.
Banks and other financial institutions are looking for well established businesses/individuals with assets and cash flow not someone with an idea in mind.
In our next blogs, we will be diving deeper in both debt and equity, separately.
Written by Pacifique Ubukombe .