If you take out a loan, you will repay the money over time (usually monthly), with interest. The lender won't receive an ownership interest in your business, and you won't have to share any of your future profits with the lender.
By contrast, if you raise money by selling equity (ownership interests), you won't have to make these monthly payments or repay the investment at any particular date. Instead, if your business is profitable, you'll have to share those profits with your investors, generally in proportion to the percentage of the business they own.
For more information on whether borrowing money or raising it from investors makes more sense, see Loans and Equity Investments Compared.
Business loans work just like any other loan -- you and the lender agree on an interest rate and a payment schedule, and you sign a promissory note that sets out your agreement in writing. The lender may require you to provide security for the loan, such as your home or other valuable personal property that the lender can take if you fail to repay the money. To learn more about the nuts and bolts of business loans, read The Lowdown on Business Loans.
If you decide to borrow money to raise start-up cash, there are a number of different ways you can repay it. The most common repayment schedule involves making equal monthly payments that incorporate both loan principal and interest. However, you can also make lower monthly payments for a short period of time, and pay off the remaining principal and interest in one large balloon payment. Or, you can make monthly payments of interest, and then make one large balloon payment of the principal and the remaining interest on a specified date. For more information on different loan repayment options, read Understanding Promissory Notes.
If you're going to raise money by taking in co-owners, the first thing you'll need to decide is whether to structure your business as a general partnership, a corporation, a limited liability company, or a limited partnership. There are advantages and disadvantages to each of these types of business organizations, so be sure to research your choice thoroughly.
In addition, depending on how many investors you take in and how much money you raise, you may need to comply with federal and state securities laws.
To learn more about these issues, read Raising Money Through Equity Investments.
Nolo's The Small Business Start-Up Kit: A Step-by-Step Legal Guide, by Peri Pakroo (Nolo), is a user-friendly guide that shows you how to launch a business quickly, easily and with confidence.
The main ways to raise money are borrowing it from a friend, a family member, or a commercial lender, or selling ownership interests (equity) in your business. There's no hard and fast rule about the best way to raise money -- you'll have to evaluate your situation and decide what kind of loan or investment you're willing to take. (Also, of course, whoever loans or gives you money will have some input, too.)
If you'll be going beyond family and friends for loans or equity investments, you'll need a business plan. For more information, see Business Plan FAQ.