There are many sources of capital for businesses, including both debt and equity. Government grants can also be a source of capital for start ups, particularly if there is a large R&D component.
Early stage companies typically rely on equity since their future cash flows are hard to predict, and fixed schedules for interest payments can make the company very unstable. Entrepreneurs typically rely on their own savings to raise equity capital, and then enlist the support of friends and family, angel investors and venture capitalists. Raising money from angel investors and VCs requires a thorough understanding of the process, including how to market your equity and how to negotiate the terms of the deal.
As a company matures, it may make sense to consider debt financing, and many banks offer loans for small businesses, as long as they are guaranteed by the entrepreneur in his personal capacity. Venture backed companies may be able to get loans without personal guarantees from banks that specialize in “venture debt”. Supplier credit and customer advances, both of which are forms of debt, can also help finance a company’s growth.
When a company becomes large enough, it may be able to raise additional equity capital by listing on a public exchange via an Initial Public Offering (IPO). The advantage of this approach is that the equity shares become more liquid, making it easier for investors to enter and exit. However, public listing has several drawbacks, such as more onerous reporting requirements.