What are the two types of financing available?

Most entrepreneurs employ a variety of techniques to raise funds for their small firms, including personal savings. External sources of finance are classified into two types: equity financing, which is money given in exchange for a stake in the company and future earnings, and debt financing, which is money that must be repaid, usually with interest. Grants and scholarships are non-repayable money that may be provided by government agencies, nonprofit organizations, or for-profit businesses.

The availability of funding can be affected by how established or mature a firm is. Financing a brand-new start-up is more difficult because there is no track record of success. Because of this risk, equity funding may be easier to get than debt financing.

For this reason, more mature businesses will find it easier to access debt financing. However, equity financing may be harder for mature businesses to find because the business, or industry, has plateau-ed with little forecast for growth. When creating a financial plan, entrepreneurs may find it useful to compare their business or potential business to industry standards for the same or a related industry or to a public company in the field which has disclosed financial information.

This page provides resources with general overviews on financing. Additional chapters on financing exist in many books on business planning. Subsequent sections of this guide focus on specific types of financing.