Debt vs Equity / Forms Of Start-Up Capital

There are two main types of start-up capital: Debt and Equity.

Debt is the amount of money owed to a person or organization for funds borrowed. It involves high risk for the entrepreneur and requires careful planning of the cash flow because the money needs to be paid back.

Equity represents the ownership interest of investors in a business. It involves bringing in investors to provide capital in exchange for an ownership stake. This form of financing involves high risk for investors and thus they expect returns from the business however the money does not need to be repaid.

Debt and equity financing provide means for companies to carry out plans that require large amount of money such as developing new product lines, acquiring another company or starting a new business. Most companies will never take on outside investors, and many will never use debt financing for growth.