Debt Financing and Equity Funding

The most common source of debt financing is commercial banks (through conventional and SBA guaranteed loans). Banks are primarily interested in minimizing risk and find most start-ups unattractive. Start-ups are typically too early in their life cycles to have the strong cash flow, low leverage, audited financial statements, and a healthy balance sheet that banks prefer.

Equity funding exchanges partial ownership in a firm, usually in the form of stock, for funding. Angel investors and venture capital are the most common sources of equity funding. Equity investors become partial owners in the firm and will influence the firm's direction.