When you’re looking for a business loan, the first place to start is to assess your company’s debt-to-equity ratio (i.e., the amount of money you’ve borrowed to the amount of money you have invested). As you might assume, the more money you have invested in your business the easier it is to obtain financing.
There are two types of financing: equity financing and debt financing.
Equity financing (or equity capital) is the money raised by a business through investors who, in exchange for their contributions, receive a share of ownership in the company (shares of stock outright or the right to convert other financial instruments into stock). Naturally, this allows business to obtain funds without incurring debt or monthly payments.
Debt financing, as you may have deduced, means borrowing money that must be repaid over a specific period. Debt financing can be either short term, with full repayment due within a year, or long term, with repayment due over a period greater than one year. The lender does not gain an ownership interest in the business, and debt obligations are typically limited to repaying the loan with interest.