Understanding different sources of capital

There are many different sources of capital-each with its own requirements and investment goals. They fall into two main categories: debt financing, which essentially means you borrow money and repay it with interest; and equity financing, where money is invested in your business in exchange for part ownership.

One mistake entrepreneurs often make in their search for capital is to raise too little or too much of it. They often lose credibility if it becomes clear that they have misbudgeted or misjudged actual capital needs or have failed to explore ways to obtain the resources other than buying them. The problem of misbudgeting is problematic-if you ask for too little, the cost of capital will usually be much higher and the process more painful when you go back to the well. However, if you ask for too much (even though some experts say you can never have too much capital in an early-stage enterprise) you may turn off a prospective investor. Worse, you may cause greater dilution of your ownership that was really necessary.