Funding for a new business venture tends to come from two primary sources. The first primary funding source is equity. Equity is the owner's contribution of funds to the start-up of the business. Often, these funds tend to stay in the business as an investment without a specific repayment schedule. Owner's equity is often a critical part of a start-up business and is also used to secure additional funds. The most common source of equity is from the owner but may also include friends and family.
Debt financing is a second potential funding source for new businesses. Loans are critically important to a business with insufficient equity to finance the start-up. While loans can be obtained from many sources (including lenders, third parties, or even family members or friends), they are typically set up with a fixed payment schedule. As a general rule, lenders may require that equity represent 25 to 50% of the total start-up costs for a new business. Loans are generally obtained from commercial banks, government agencies, or some other third party that sets a specific repayment schedule.
Loans may be secured or non-secured. Non-secured loans are based entirely on the borrower's financial strength and past performance. Secured loans require that assets be used as collateral to secure the loan. Various combinations of equity and debt as well as the various sources of start-up funds exist from business to business. However, a heavy majority of the total start-up costs of a new business are most often provided from personal finances followed by funds from commercial lenders, friends, and relatives of the owners and outside investors. Commercial lenders often cite a lack of owner's equity, lack of proper business skills, or collateral shortfalls as some of the primary reasons they decline credit to new business ventures.
