When deciding to open a small business, the most significant issue a start-up owner might face is financial. Indeed, without proper financial means, the development of a start-up idea will not be possible. For that matter, several ways exist to obtain finances for a start-up, ranging from personal or business loans to the generation of one’s capital. Since the options are different, it is essential to identify the advantages and disadvantages of each of them to make an informed decision. This paper explores loans and capital building to identify a more reasonable way to obtain financial support for a start-up.
A person launching a start-up project might consider taking a loan to start their small business. However, it is noteworthy that two types of loans apply to such a situation. Loans might be personal and business, meaning the conditions and implications might differ for a person taking the loan (Suknanan, 2023). Personal loans are safer and less complicated than business loans because when applying for a business loan, one should file a detailed business plan to convince the bank that the company will be profitable (Suknanan, 2023). However, these details will not be necessary to obtain a personal loan. In this regard, business loans might be restricted in credit amount and impose risks for the failure of returning the loan.
Nonetheless, using a loan implies a bank’s interest rate that might vary depending on one’s credit history and economic situation (Excel High School, 2022). Thus, borrowing money might be an additional burden on a business owner when the start-up develops at a lower rate than predicted. In this regard, creating one’s capital would be wiser and more sustainable from a long-term perspective. According to research, “equity (ownership) funding is a more traditional way of financing startups, and it can be a more efficient way to achieve [one’s] business goals” (“Should you finance your startup with a loan or equity,” 2023, para. 5).
When deciding on the amount of equity necessary for proper financial support of a start-up, one should consider several factors. They are the profitability of a business in a long-term perspective, expected rate of business growth, additional costs, and “working capital needs” (“Should you finance your startup with a loan or equity,” 2023, para. 8). Once the amount of equity is identified based on these factors, investors might be attracted to the business idea to form capital for the company’s future development. The complication of such an approach is the unpredictability of investor interest, which might be addressed by a proper financial prognosis and profitability plan to convince potential sponsors to invest.
Although financing a start-up is a challenge for new entrepreneurs, there are several ways of doing it. In particular, as the presented discussion has shown, generating one’s own capital is wiser than taking a loan. In the long run, it is less financially risky and more sustainable to rely on ownership financing by attracting investors to the business. In such a manner, the return on equity will motivate the sponsors to invest in the start-up, and the business owner will have the financial means to develop the company with limited risks.
References
Excel High School. (2022). Intro to business.
Should you finance your startup with a loan or equity? (2023). FasterCapital. Web.
Suknanan, J. (2023). Should I take out a personal loan to start my small business? CNBC. Web.