Two important ways of financing a business are:
1. Dept finance
2. Equity finance
Debt Finance:
Debt finance is a way in which money is invested in a business in the two most common ways
1. By investing through personal savings or earnings
2. Taking a loan or by borrowing money from the government or private institutions
As it is a fact, the startup of new business demands financial support. In every business, the owner needs to invest money in the form of purchasing machinery, tools, or equipment, hiring employees on good packages, paying bills/rents, and other resources that are needed for a business project. These needs can be fulfilled by investing the personal savings which are earned by working as an employee in other companies furthermore the experience gained while working as an employee matter a lot. By working as an employee, a person gains knowledge of working as a team. He gets an overview of how a financially stable and profitable company or business works. Moreover, he also saves money which gives him the advantage of investing in his business.
For financial aid, small business-supportive companies are established worldwide that helps people for starting their own business. Government, banks, and various other governments as well as private institutions have commenced several schemes by which they provide benefits of giving loans to individuals for starting a new business. Many people mortgage their personal belongings like houses or cars to take loans from companies or banks. Some banks also assure people to take insurance so that if they don’t become able to pay back the loan, the insurance money will be given to the bank after the death of the individual.
Equity Finance
Equity finance is a way in which investors invest money in a business in the following ways:
1. Investing by being a partner in that company
2. Purchasing shares of that company
Equity finance includes starting a new business with a partner that benefits them in financial support. Many agendas and strategies are planned by both individuals which include the idea of making something, retailing equipment, and investing money in which sector will benefit or increase their profit. Stakeholders and partner ownership in any business have many pros and cons.
So, the most popular way of investing in a business in modern days is purchasing shares of that company. This is usually done when a company is facing financial crisis or lose, so investors invest their money by purchasing shares of that company. In this way, they become shareholders of the company.
Conclusion:
To start a small business, an entrepreneur needs some investment or financial support. He can take loans and pledge his personal belongings. Equity finance is much better than debt finance. Equity finance benefits the owner in such a way that rather investing all of his savings in a company he can make someone his partner. Moreover, when the business is facing a financial crisis the owners can sell the shares of the business. In this way, he did not have to re-compensate the loan to banks or other companies.
