How do businesses acquire start up funds?
Businesses can acquire start up funds by two methods.
If the owners of the business that is being started can convince financial institutions to lend them the money required by demonstrating that they would be able to pay back the amount being borrowed and the interest due on it either from the revenues earned by running the business or from their personal assets they can acquire start up funds in the form of debt.
Else, the owners of the startup can sell a part of the business that is going to be set up to other investors for which they would have to give in the future a part of the profits made by the business to them. This is known as equity funding.
When start up funds are being acquired to set up a business, the owners have to choose from the two options keeping in mind the advantages and disadvantages of both. For funds acquired in the form of debt, the business is under an obligation to pay the interest and a part of the principle irrespective of whether a profit is made or not. In equity funding the business would only have to pay if it made a profit. On the other hand, the amount to be repaid in debt funding is fixed and if the business is able to make a lot of profit the owners can keep all of it instead of having to give a part to the equity partners.