What are My Business Financing Options?4:00 with Pasan Premaratne
Are you starting a new business and wondering what your financing options are? Treehouse Business teacher Pasan explains the various kinds of business financing available to you, including equity financing, debt financing, and angel investors, as well as each of their pros and cons.
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[Treehouse Presents - Quick Tips: What are My Financing Options? with Pasan Premaratne] 0:00 Hi! I'm Pasan. In this Treehouse Quick Tip, we're going to discuss the different kinds of financing options available to your business. 0:05 When financing your new business, you have 3 options—equity financing, debt financing, 0:13 and other sources like angels and venture capitalists. 0:18 In equity financing, you sell an ownership stake in your company to an investor in exchange for funding. 0:21 The advantage of equity funding over debt financing is that with equity, you don't have to pay back any of the money that you sourced. 0:27 Investors gain a return when the value of that ownership stake increases as the company performs well and grows. 0:34 The only disadvantage to this is that every time you sell an ownership stake, it reduces yours. 0:40 So as you bring more and more investors on board, you're relinquishing more and more control of the company. 0:46 Debt financing, on the other hand, is much more common, much quicker to obtain, and available in many different sources. 0:52 Unlike equity financing, however, you do have to pay the debt back. 0:59 This means that any extra cash that you have can't be used to improve operations or increase business, 1:03 because the debt has to be serviced. 1:09 Let's look at some of the sources of debt financing available to a newly-minted business. 1:11 The most common type available is a bank loan. 1:16 In this economy, that sort of lending may have slowed down a little, but you can still get one, providing you do your part. 1:19 When taking out a bank loan, you may need to show the bank a business plan. 1:25 They will be interested in what your business does, how much money you need, and how you intend to spend it. 1:29 More importantly, though, they will want to know how you intend to pay them back and how long it will take. 1:35 So be prepared to show financial projections. 1:41 In the United States, the Small Business Administration provides all sorts of loans for small businesses. 1:44 While the SBA puts up the money, the actual loan is delivered to the business through commercial banks. 1:49 While the SBA is a US institution, the concept isn't unique to this country. 1:55 Look for government institutions that will help you finance your company. 2:01 If you happen to be in an industry that the government supports, you can find plenty of grants and loans to finance your business. 2:05 You just need to do your research and look for them. 2:12 A lot of entrepreneurs use credit cards to finance their business. 2:14 Now while it's a viable source, you have to be careful with a credit card and pay it back as fast as you can to avoid high-interest payments. 2:18 If you do get one, use it wisely and establish guidelines for putting payments on the credit card. 2:25 Do not use the card for personal spending and even more important, try to only purchase revenue-generating items on the credit card. 2:31 Finally, as a rule of thumb, don't borrow any money that you can't repay in the near future. 2:39 Now while those are the most common, they're not the only kind available. 2:45 You have options like a home equity line, which is essentially asset-back borrowing. 2:48 You could use your retirement funds, borrow against your life insurance policy, and even go for private debt offering. 2:52 There's a lot of choices out there. 2:58 But other than traditional debt and equity financing, there's also sources like angel investors and venture capitalists. 3:00 Angel investors are high net-worth individuals who invest in emerging companies, usually in their area of expertise. 3:07 Anyone with money can be an angel investor, so they're somewhat hard to find, given that there's no central directory of them. 3:14 Angel investors do, however, hold meetings often. So prepare your presentation and hunt for them. 3:21 Unlike angel investors who are individuals, a venture capital fund is a pool of money from high net-worth investors. 3:27 A fund manager then selects companies to invest the money in. 3:34 To receive venture capital funding, companies must go through an extensive review process, 3:38 after which they agree to terms and sign a stock-purchase agreement. 3:43 Most venture funds invest in certain types of businesses only, so check to see whether your company matches up with their ideals. 3:47 So that's a quick list of sources for financing your business. There's always money out there, you just need to know where to look. 3:54
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