Source Capital Funding: Comparison Of Equity and Debt for Start-Up Businesses SMEs

Abstract

Funding issues are a fundamental problem faced by start-ups and Micro, Small, and Medium Enterprises (MSMEs), especially in the early stages of business development. Limited capital often becomes an obstacle in running operations, expanding businesses, and increasing competitiveness. In general, business funding sources are classified into two types, namely equity and debt, each of which has different characteristics, benefits, and risks. This study aims to analyze the comparison between the use of equity and debt as funding sources for start-ups/SMEs, as well as to examine the leverage risk incurred. The method used is a literature study supported by a case study of Es Teler 77 SME as an example of a successful business that started with own capital. The results show that own capital provides a higher level of security and flexibility in the early stages of a business because it does not incur interest and installment payments. However, limited own capital can hinder business growth. On the other hand, debt can be a solution to meet immediate capital needs and accelerate expansion, but it has the potential to cause over-leverage risks if not managed properly. Therefore, the selection of funding sources must be adjusted to the cash flow conditions and stage of business development in order to support sustainable growth.