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What are the Different Types of Business Start-Up Capital?

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  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 27 October 2016
  • Copyright Protected:
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Nearly every successful business has started with a good idea and enough money to put it into practice. Business start-up capital is the money used to begin operations and is critical to surviving the first year or few years of a new business. Without business start-up capital, there is no money to fund research, rent premises, buy materials, hire and pay employees, and create advertising. There are many different types of business start-up capital, but most tend to fall into one of two categories known as debt or equity financing.

In equity financing, investors trade money for part ownership of the company. This is the realm of venture capitalism (VC), where VC companies will invest money, sometimes in several stages, in return for stock in the company or seats on the board. If the company goes public, the venture capitalists typically make a large return on their investments and may decide to remain with the company or sell out their shares.

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Equity financing can also take the form of a partnership, which trades business start-up capital for a significant share, up to 50%, of the company. Taking on a partner does mean giving up sole ownership, and must be carefully considered on both sides. Good partners can complement strengths and weaknesses, and help make the business stronger both financially and through their own skills. A bad partnership, on the other hand, can lead to power struggles and an ever-increasing load of stress as business progresses.

For those who do not want to give up full ownership or can't yet attract venture capitalists, business start-up capital can also be generated through loans. This type of capital creation ins known as debt financing, and carries its own long-term risks. Whereas investors take their own risks and are responsible for their own losses, loans must be paid back regardless of the success or failure of the business. Nevertheless, choosing debt financing does allow a sole owner to retain control of the business, which may be the most important consideration for some entrepreneurs.

There are several ways to raise business start-up capital through debt financing. Some governments provide start-up loans for small businesses as a means of stimulating the economy. Banks often include a business loan division that will lend a sum in return for collateral, such as a lien on property. People also may be able to approach friends and relatives for loans, though this can be a very delicate issue that runs the risks of damaging relationships as well as credit.

Many entrepreneurs try to generate business start-up capital through a variety of small funding efforts, rather than putting all their eggs in one basket. A person may invest his or her own savings, take on a partner, and get a small bank loan. Gathering funding from diverse sources can reduce pressure to generate fast returns, as no single investor has put up an enormous sum.

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