To Borrow or Not to Borrow For many new business owners, that is the question.

(YoungBiz.com) - Cash, moolah, dough,greenbacks--everyone needs it, especially a first-timeentrepreneur. You could have a great idea, a thorough business planand customers just waiting for you to open your doors, but if youdon't have the funds, you can't get your business off theground.

So what's a 'trep to do? Unless you want to raise themoney yourself through part-time jobs, yard sales and the like,there are basically two ways to finance a new business: debtfinancing, usually through a loan or credit card, and equityfinancing, in which investors buy "stock" in yourcompany. Both have pros and cons, as 'treps Angeil Brown andDan Villa recently found out.

Taking Stock
A couple years ago, Brown, now 20, of Houston, turned herpicture-taking talents into a business and even involved some ofher classmates. Unfortunately, photography businesses have a lot ofstart-up costs. Cameras, film and developing equipment don'tcome cheap. With no established credit history, a bank loan was outof the question.

One of their teachers suggested Brown and her classmates offershares of the business to friends, parents and teachers for awhopping $1 per share. They soon raised between $200 and $300 incapital. Sound too good to be true? Well, there was one catch. Inreturn for their $1, investors would evenly split 10 percent of anyprofit the company made. They may have given up a bit of theircompany, but Brown feels it was the right decision.

"It's a win-win situation," she explains. "Asbusiness owners, we are able to cover our expenses, and, at thesame time, our investors make money when the companyprofits."

Villa, 19, on the other hand, chose debt financing when hestarted Pintlar Delivery Service in his hometown of Anaconda,Montana, through a loan from the Anaconda Local DevelopmentCorporation (ALDC).

"The ALDC contacted the teacher in charge of the School toWork program and said they were willing to give a loan for a youthbusiness," Villa remembers. He was chosen from the field offive, and the organization quickly approved his business idea(their only condition for the loan). He then provided the ALDC withan estimate of his start-up and operating costs, and was soon giventhe $500 he needed.

While Brown gave up a portion of her profits to her investors,Villa makes a loan payment each month--with interest. Like Brown,however, he's convinced the decision was right for hiscompany.

So What's theAnswer?
Because every business is different, there's no one rightanswer. Before you make your decision, take a closer look at thepros and cons of both equity and debt financing:

The Pros

• Paying back a loan or using a credit card responsibly can bethe start of a good credit history, something you'll need inthe future when you want to buy a car or a house. "This helpsme establish credit," Villa explains of his ALDC loan.
• With equity financing, you don't have to make loanpayments.
• Villa believes that making the monthly payments on his loanhelps build character. "I really think the payments make you amore responsible person," he says.
• With a loan, the money is available as soon as you'reapproved and the papers are signed. A credit card is there wheneveryou need it, as long as you don't exceed your limit.
• While Brown's investors could potentially have a say in howher business is run, banks and credit card companies leave themanagement up to you as long as you pay them on time.

The Cons

• Interest rates, according to Villa, are the deciding factor onwhether he would choose to get a loan again. "The only reasonI wouldn't want a loan is if the interest rate was toohigh--you'd end up paying that back for years."Credit-card rates vary, so it pays to do a little research. Also,don't be afraid to ask if there is a lower interest rateavailable. The first rate you're offered often is not the bestrate the company has available.
• With equity financing, you give up partial ownership of yourcompany to your investors. This could mean giving up partialcontrol of your decision-making process as well.
• The approval process for a loan, or getting a company to issueyou a credit card, can be a daunting task that could require yourparents' help.
• Just as a loan or a credit card can provide you with afavorable credit report, it can also do just the opposite ifpayments aren't made in full and on time. And, just to add tothe fear factor, many loans require collateral, something of valueyou tell the bank you'll give them if you default on the loan.Like your car. Yikes!
• You've got to be cautious, or you can get in over yourhead. Remember, credit card companies make money off of theinterest you pay on the money you borrow, so the more money youborrow and the longer you take to pay it back, the more money theymake. Good new for them; very bad news for you.

A couple words to the wise: Know how long it will take for youto pay off the money you've borrowed. While a bank loan istypically paid back over a designated period of months or years,credit cards operate on "monthly minimums"--and paymentsof only the monthly minimum can drag on for many, many years. Ifyou borrow off of a credit card, draw up a payment schedule foryourself if you need to, based on the interest rate and the monthlyamount you can afford. An interest rate calculator, such as the oneat http://www.interestratecalculator.com, can help you todo that.

Also, if you feel a credit card company has extended you morecredit than you feel you can afford to borrow, ask them to cap yourcredit at a certain level. Otherwise, they will automatically raiseyour credit limit periodically, as long as you're in goodstanding. And you might be tempted to spend those extra bucks onnonessentials.

Villa believes that credit can be a good thing and that everyonemay initially make some mistakes. The key, they say, is to doextensive research and honestly assess what amount you can repay ona monthly basis. If you do all this, a bank may just end up givingyou a little credit.