Compare the cost of different sources of financing

The cost of debt financing (loans) is interest. The cost of equity financing (investments) could include dividends or a share of the profits. Comparing the two may involve a cost of capital calculation and analysis. You would in effect compare the interest charges on a loan with the percentage of your company’s retained earnings or accumulated profits that really belong to the investor.

If you can obtain loans from different banks, compare the interest rates and payment terms they offer. You may want to determine the total interest cost over the life of each loan to have a comparable base. Small differences in the interest rate can add up to significant amounts over a long-term loan. Keep in mind that short-term unsecured loans, such as lines of credit, generally carry a higher interest rate than long-term secured loans, such as mortgages.

Consider the possibility of venture capital or angel investors

These are equity types of financing, so you will be obtaining funds in exchange for part of the ownership of your business. An angel investor is generally an individual who is willing to invest in higher-risk, start-up companies, in exchange for a higher rate of return than on other investments. Venture capital, or risk capital firms are also interested in investing in a business with good earnings and growth potential. Typically, angel investors are more likely to invest in a smaller, entrepreneurial company, while venture capital firms deal in larger amounts. An angel investor may also be able to contribute significant knowledge and experience, and could become a good advisor for your business. A search on the Internet will show you how many angel investors and venture capital firms are out there. But especially in the case of an angel investor, there is a personal relationship involved, and you may want to seek out this type of financing by using your network of friends, business associates, and professional advisors.