The way it works is this:
VCs or Angel investors buy equity in your business (they buy a share in the business) with the money they 'give' you. As someone else has pointed out in this thread, VCs are unlikely to be interested in an investment this small - so realisticaly we're talking about equity investment by angels or friends / family.
In either case, you'd be selling them a percentage stake in the business - they'd become part-owners.
(Unless your family would actually *give* you money, in which case we're talking about a gift rather than an investment).
When someone buys a share in your business, they get:
- a say in how it's run
- a proportion of the money if you sell it
- a proportion of the money if you pay out dividends
A loan, on the other hand, has regular interest payments, but the lendor doesn't take ownership of any of the equity.
The key difference:
- With a loan, you know in advance how much you're giong to have to pay each month, and if you default (don't pay it back) then the lendor comes and takes away whatever it is you put up as security for the loan (just like the bank having a mortgage on someone's house).
- Whereas with equity investment, if things go badly then you don't have to pay out any money at all. If things go well on the other hand, the deal will usually be structured so that the investor gets more money than they would have got if they'd given you a loan. This is their reward for the extra risk they run.
You're unlikely to be able to get a bank loan unless:
- the business has assets you can use as security,
- you're prepared to use some of your personal assets as security (personally I see this as a Bad Idea)
- you use a scheme where the government provides security to the bank for your loan, such as the Small Firms Loans Guarantee Scheme here in the UK.
A few useful books:
High Tech Start Up by John L. Nesheim
The New Business Road Test by John Mullins
The Venture Capital Handbook: Strategies for Successful Private Equity Investment by William D. Bygrave, Michael Hay, Jos B. Peeters
Smarter Ventures by Katharine Campbell
(some of these are now a bit out of date, so if anyone has more recent recommendations, I'd love to hear them).