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[Treehouse Presents - Quick Tips: What are My Financing Options? with Pasan Premaratne]

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Hi! I'm Pasan. In this Treehouse Quick Tip, we're going to discuss the different kinds of financing options available to your business.

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When financing your new business, you have 3 options—equity financing, debt financing,

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and other sources like angels and venture capitalists.

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In equity financing, you sell an ownership stake in your company to an investor in exchange for funding.

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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.

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Investors gain a return when the value of that ownership stake increases as the company performs well and grows.

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The only disadvantage to this is that every time you sell an ownership stake, it reduces yours.

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So as you bring more and more investors on board, you're relinquishing more and more control of the company.

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Debt financing, on the other hand, is much more common, much quicker to obtain, and available in many different sources.

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Unlike equity financing, however, you do have to pay the debt back.

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This means that any extra cash that you have can't be used to improve operations or increase business,

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because the debt has to be serviced.

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Let's look at some of the sources of debt financing available to a newly-minted business.

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The most common type available is a bank loan.

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In this economy, that sort of lending may have slowed down a little, but you can still get one, providing you do your part.

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When taking out a bank loan, you may need to show the bank a business plan.

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They will be interested in what your business does, how much money you need, and how you intend to spend it.

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More importantly, though, they will want to know how you intend to pay them back and how long it will take.

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So be prepared to show financial projections.

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In the United States, the Small Business Administration provides all sorts of loans for small businesses.

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While the SBA puts up the money, the actual loan is delivered to the business through commercial banks.

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While the SBA is a US institution, the concept isn't unique to this country.

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Look for government institutions that will help you finance your company.

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If you happen to be in an industry that the government supports, you can find plenty of grants and loans to finance your business.

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You just need to do your research and look for them.

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A lot of entrepreneurs use credit cards to finance their business.

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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.

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If you do get one, use it wisely and establish guidelines for putting payments on the credit card.

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Do not use the card for personal spending and even more important, try to only purchase revenue-generating items on the credit card.

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Finally, as a rule of thumb, don't borrow any money that you can't repay in the near future.

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Now while those are the most common, they're not the only kind available.

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You have options like a home equity line, which is essentially asset-back borrowing.

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You could use your retirement funds, borrow against your life insurance policy, and even go for private debt offering.

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There's a lot of choices out there.

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But other than traditional debt and equity financing, there's also sources like angel investors and venture capitalists.

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Angel investors are high net-worth individuals who invest in emerging companies, usually in their area of expertise.

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Anyone with money can be an angel investor, so they're somewhat hard to find, given that there's no central directory of them.

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Angel investors do, however, hold meetings often. So prepare your presentation and hunt for them.

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Unlike angel investors who are individuals, a venture capital fund is a pool of money from high net-worth investors.

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A fund manager then selects companies to invest the money in.

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To receive venture capital funding, companies must go through an extensive review process,

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after which they agree to terms and sign a stock-purchase agreement.

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Most venture funds invest in certain types of businesses only, so check to see whether your company matches up with their ideals.

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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.