Financing Options for a New Michigan Company
One of the most important practical issues that a new company must deal with is financing. Although there are many different financing options, they basically boil down to two types of capital infusions: equity capital or debt capital. Equity capital consists of the owners' investment in the company. Debt capital comes from a loan. Most new businesses are financed by a combination of debt and equity capital.
Equity Financing
There are a number of advantages to funding a start-up company with equity capital. First, since it is a permanent investment, it does not have to be paid back. This relieves a new business of the (sometimes substantial) burden to its cash flow that comes with the responsibility of repaying a loan. A second advantage is that the more company owners invest in the business by way of equity capital, the greater the new company's creditworthiness will be. That in turn will enable the business to get more favorable payment terms from vendors and will also lay a sold foundation for leasing and bank financing on favorable terms. Similarly, a significant equity investment by the owners of a new company also promotes the new business's creditability with financial institutions, its suppliers, and its customers.
Debt Capital
Many businesses obtain start-up funds by getting loans from relatives, friends, business associates, private investors, and banks. These loans can be in the form of traditional loans or by way of an exchange of ownership stock. However, as much as possible, it is best that debt capital come through a traditional loan and not an exchange of ownership stock so that the new company's owners can maintain the largest ownership percentage possible. Loans may come in the form of a direct loan or they can be in the form of a personal guarantee of a bank loan to the business. Although many banks will not normally make loans to new or risky businesses, the federal Small Business Association has a number of loan guaranty programs that can make it possible for new businesses to obtain debt capital financing that would otherwise be unavailable.
