Capital sources: Types of financing
types of financing surface in any discussion about finding sources
of money: debt financing and equity financing.
The easiest way to raise money is through debt financing,
or loans. Commercial lenders such as banks and finance companies
tend to be the biggest source of debt financing. Through debt financing,
the borrower is able to get funding and maintain control of the
business. Lending terms are outlined in advance, and usually include
a payback schedule and interest rates.
Equity financing means selling a stake in the business
for money. Basically, the business owner gives up a share of the
profits to the investor, and possibly some control of operations.
Investors speculate that the business will succeed and that their
shares will rise in value. When you think of equity financing, you
can think of the stock market, where company shares are bought and
sold every day by businesses hoping to raise money.
You might also want to consider debenture. It is a
type of loan, really a note, that the business owner gives the lender
in exchange for money. Terms can be less stringent than commercial
loans in respect to payback schedules as it is an agreement between
the company and the investor. To make the loan terms more attractive
for the lender, you can offer convertible debentures, wherein the
loan can later be exchanged for equity, or stock, in the business.
Whether you hope to obtain financing from your in-laws
or a full-fledged commercial lender, you'll have to answer certain
questions. Most will be addressed in your business plan and loan
proposal, but be prepared to face the questions on a loan application,