In the investing world, we have two basic forms of capital; Debt and Equity. Most Americans are familiar with debt, but equity is usually foreign to us in the business world. Let’s break ‘em down.
Small Business Capital: Debt
Debt is the most common form of small business capital. Simply put, debt is borrowing money that you have to give back at some point in time. The most popular form of debt is a term loan. Think about when you finance a car or a house. You borrow X amount of money and have X years to pay it back with interest. That’s a term loan.
Then, we have small business bonds. Larger corporations historically have been issuing big bonds all the time and taking that money to reinvest in the business. Now, small businesses can do the same.
Lastly, there’s something called a revenue share agreement. It’s our favorite. This form of debt is used by taking a percentage of your revenue to pay back your investors at an interval you agree upon.
Small Business Capital: Equity
Now let’s move over to equity. This is where you’re swapping ownership for cash. People are basically buying a piece of your company. You can figure out what percentage to sell by getting a valuation of the business.
A newer form of equity is called a simple agreement for future equity (S.A.F.E.) and it works by figuring out what the valuation is later, or kicking the can down the road a bit.
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