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Created by FindLaw's team of legal writers and editors | Last updated September 21, 2022
You are ready to start your own business, but don't know where to look for financing. You are curious about loans and heard something concerning equity, but this isn't your area of expertise. You are not alone. One of the hardest decisions facing small business owners is how to obtain financing for their business.
Most business owners really have two options: take out a loan or sell a piece of their business for start-up cash. Follow along as FindLaw helps you explore the different options that may be available to you.
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While there are no hard and fast rules, if you are in the formation stage of setting up your business, it makes sense to strongly consider selling an equity stake in your business in order to secure financing to get it off the ground. Equity sales are advantageous because they don't require any repayment, and most businesses don't turn a profit for a significant time period, which makes paying back loans extremely difficult.
If you are an established business and have ongoing financing needs, then loans may make a lot more sense. Loans are easier to deal with when a company has enough cash flow to make repayment realistic, and an established company likely has more collateral to offer to secure the loans. Finally, it's worth noting that loans and equity are treated differently for tax purposes, so consult with a business tax advisor to see if one course of action makes more sense than the other.
Whether you should choose loans or not depends largely on the maturity of your business, cash flow and whether you're simply unwilling to give up any more control in your company.
Equity is a mixed bag of benefit and cost, and the factors that influence whether you choose to use equity sales to fund your business include whether your business is still young or expanding and your willingness to give control over the business to people other than yourself.
For more information, see our comprehensive section on Starting a Business.
Let's face it. Financing is one of the most important decisions you can make during the formation of your small business. A lawyer can help sort through the relevant considerations before determining whether a business loan or an equity sale is right for you. Contact a small business attorney to learn how they can help you get the financing you need.
Contact a qualified business attorney to help you navigate the process of starting a business.
We have a DIY option you can use to save time and stress.We help you:
Prefer to work with a lawyer?Find one right now.