A Loan by Any Other Name May Not Smell As Sweet ? Merchant ...

You?ve done the deed and written your business plan ? now you?re ready to move onto finding those pesky funds needed to startup and/or keep your small business up and running.

Or are you?

As a small business owner no one knows more about the nature of your business than you do.? Can you say the same when it comes to knowing about the various types of funding available?

Unless you have prior experience obtaining small business loans (and even if you do) your answer may well be ?No.?? Of course you may not be one of those ?bean counter? types and prefer to leave all that mumbo jumbo to the experts.

However, the fact is you are on a mission to make a purchase.? In this case you?re out to buy yourself some money.? If you were going to go buy a car would you let the salesman pick out what make, model and options you wanted to buy?? Of course not.

Knowledge is power, so let?s power up and review some basic options for funding your small business.

The ?D? Word

There are two main types of funding available for start-ups:? debt financing and equity financing.

You?ll probably be most familiar with debt financing.? This means a loan which must be paid back according to a specific schedule of payments, in a specific amount, most usually with a specified rate of interest applied, and within a specified period of time.

Simply stated, with debt financing, you borrow t money and agree to pay it back in a particular time frame at a specified rate of interest.

Debt financing is not just a risk for the person or institution that does the lending.? When using debt financing methods the loan must be repaid whether or not the business succeeds.? You, the business owner, assumes this debt even should the business fail.

Banks loans are a type debt financing, as are loans from family and/or friends.? Using existing credit available to you (i.e. credit cards, real estate or other equity loans) is also a form of debt financing.

We?re Not Talking Home Equity Loans

Equity financing may sound the same as using the equity you have in your home or other investments to secure a loan to fund your business.? But equity financing is different than using personal equity (such as real estate) to secure a loan.? When a small business uses equity financing, the owner ?sells? partial ownership of the company in exchange for the funds received.

Unlike debt financing where it is the business owner who must repay the loan even should the business fail, equity financiers assume all or part of the risk should the venture fail.? This sounds like a much better deal for the business owner, but when assessing what is best for your small business, you must take into consideration that equity funders normally anticipate a much greater return on their investment than banks, or friends and family (translation: you may pay equity investor more in terms of return than you would paying interest if using debt financing.)

Another thing to consider is that it is also common for equity investors to become rather involved in the companies they fund.? As a small business owner you may be very hesitant to allow others to have a ?hands on? influence on how you run your business.? On the plus side is the fact that equity funders are taking a big risk but only when they anticipate a big return ? so they are usually quite experienced in the ability to identify good business models and then help build the startup into a successful business.

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