J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Debt versus Equity Financing

More than 80% of start ups require $10,000 or less of capital to get started. Most small business owners start with their own money, but some need additional financing. Even in this tight credit environment, you can still find the seed money you need if you know where to look. There are 2 main ways to get the capital you need for starting a business:

1. Debt (borrowing the money)

2. Equity (taking in investors)

You can use 1 financing method, the other method, or both. There are also alternative financing options. There are practical, legal, and tax considerations to your decision.

Debt Financing

Debt means borrowing money that must be repaid. For instance, you may go to a friend or a bank to raise the $10,000 you need to start up. The $10,000, plus interest, must be repaid to the lender (creditor) over a fixed period.

There are many places to look for loans: your own resources (e.g., using home equity loans), family and friends, and commercial loans (e.g., SBA-backed loans are obtained through commercial lenders and not directly from the SBA).

The positive thing about debt financing is that the relationship is limited in a couple of ways. First, the lender usually has no say in how you run your business. As long as you repay the loan on time, the lender is happy (you may be required to provide financial information on an ongoing basis to keep your loan in good standing). Second, the relationship has a limited duration. Once you’ve repaid the loan, ...