It is also advisable to include the initial year or two of operating costs as part of a start-up package, because most businesses will not be profitable enough to fully support their expenses and growth from operating income in the first couple of years. Therefore, start-up costs might additionally include the first two years of labor costs , rents , and one to two years of raw materials costs . Another important distinction to make is to recognize the difference between debt and equity. While both are legitimate and necessary sources of capital, it is very difficult to start a business solely from borrowed funds, which are debt. Borrowed funds are more expensive , since the borrower pays interest on the funds, and debt is usually required to be repaid more quickly than a start-up business can handle.
Most businesses obtain their initial funding from equity capital.
Unlike debt, equity money is not a loan to the business. Equity funds actually give the provider of the funds a stake as an owner in the long-term success or failure of the business. The amount of ownership that an equity investor might claim in a business in exchange for the money is somewhat commensurate with the ratio of the amount of money provided compared to the total value of the business at the time of the equity infusion. In reality, however, the percentage of ownership claimed by an equity investor is a matter of negotiation between the primary business owner and the investor. Equity is less demanding on the business' cashflow, but it gives someone else a say in your business because they become an owner.