If you’re starting a sideline business, you need adequate capital. Broadly speaking, business entities are financed in two ways:
- Equity. Anyone supplying funds to back a new business may want an ownership stake. If your company is organized as a corporation, they will become shareholders.
- Debt. Loans also may be used to finance a business. Lenders do not become co-owners but they’ll probably insist on regular repayment, plus interest. Failure to meet those terms can lead to a borrower’s bankruptcy.
Business owners typically prefer debt financing. Having a fixed obligation to repay usually is preferable to relinquishing a portion of a company’s future growth.
In practice, many business owners draw down personal credit lines to provide initial financing for their company. For additional credit, a business owner’s personal guarantee also will be required. Subsequently, if you default the lender may be able to seize not only business property but also your personal assets in order to be repaid.
