The Two Types of Capital
In simple terms, there are two types of capital a company can obtain.
Business Loan: A business loan is an obligation to pay back money at a certain interest rate over a specified period of time. One advantage is that the source providing the loan has no voice in managing the business. Another is that it’s neither entitled to your profits, nor responsible for its losses. Different types of business loans include business overdrafts and lines of credit.
The disadvantage is that if the business is not able to repay the loan, the business owner may be personally liable for its repayment depending on its terms. If a business isn’t able to pay the loan back, the business owner may lose the control of the company to the creditor. Two other elements to consider include the loan term and loan amount. Also consider the way interest is charged. Options include a fixed interest rate and a variable interest rate.
Cash Investment: A cash investment is the purchase of equity in a business (that is, shares or stock) from a buyer. It typically requires additional expenses incurred from accountants and lawyers to document the sale. The advantage is if the money is lost, the owner has no obligation to pay it back.
The disadvantage is that the investor typically gets to give input on how the business is run and a share of its profit. When accepting investors, the business owner has also taken on a partner in the company to whom they are required to report results.