Business Financing FAQ

Here are answers to some of your most frequently asked questions about raising money for your small business.

How can I raise money for my business?

The main ways to raise money are borrowing it from a friend, family member, or a commercial lender, or selling ownership interests (equity) in your business. There's no hard and fast rule about the best way to raise money -- you'll have to evaluate your situation and decide what kind of loan or investment you're willing to take. (And, of course, whoever loans or gives you money will have some input, too.)

If you'll be going beyond family and friends for loans or equity investments, you'll need a business plan.

What are the main differences between borrowing money and selling ownership interests in my business?

If you take out a loan, you will repay the money over time (usually monthly), with interest. The lender won't receive an ownership interest in your business, and you won't have to share any of your future profits with the lender.

By contrast, if you raise money by selling equity (ownership interests), you won't have to make these monthly payments or repay the investment at any particular date. Instead, if your business is profitable, you'll have to share those profits with your investors, generally in proportion to the percentage of the business they own.

How do business loans work?

Business loans work just like any other loan -- you and the lender agree on an interest rate and a payment schedule, and you sign a promissory note that sets out your agreement in writing. The lender may require you to provide security for the loan, such as your home or other valuable personal property, that the lender can take if you fail to repay the money.

If I borrow money, what are my repayment options?

If you decide to borrow money to raise start-up cash, there are a number of different ways you can repay it. The most common repayment schedule involves making equal monthly payments that incorporate both loan principal and interest. However, you can also make lower monthly payments for a short period of time, and pay off the remaining principal and interest in one large balloon payment. Or, you can make monthly payments of interest, and then make one large balloon payment of the principal and the remaining interest on a specified date.

How do I sell ownership interests in my business?

If you're going to raise money by taking in co-owners, the first thing you'll need to decide is whether to structure your business as a general partnership, a corporation, a limited liability company, or a limited partnership. There are advantages and disadvantages to each of these types of business organizations, so be sure to research your choice thoroughly.

In addition, depending on how many investors you take in and how much money you raise, you may need to comply with federal and state securities laws.