Starting a new small business is a challenging venture. There are endless lists of expenses, and the revenue doesn’t always start to trickle in right away. If you’re looking to quickly start and grow your small business, consider exploring various forms of small business funding options and how they apply to your business plan to raise the capital you need.
How Business Funding Can Help Grow Your Small Business
There are many reasons to seek business funding for your small business. Before you begin researching your options, it’s best to determine your goals and business needs. What do you plan to do with the funding? Having your objectives clearly outlined not only convinces others to invest or lend money but it ensures that you have a plan for the future of your business.
Some common reasons to seek business funding include:
- Increasing working capital: Many businesses need to have enough funds to cover short-term gaps or unexpected expenses.
- Purchasing a new asset: In order to grow your business, you may need capital to purchase new machinery or a vehicle.
- Expanding business horizons: Being able to fund growth is key, especially if you need to hire more staff or improve your range of products.
- Restructuring debt: Consolidating your borrowing can help the business to reduce its monthly repayment costs.
Seeking Different Types of Investors
Many small businesses choose to work with outside investors. There are many different kinds of investor groups that fund small businesses at different stages of entrepreneurship. It’s best to fully understand the terms of the investment deal so you know how much control or equity you’re giving up in exchange for business funding.
Types of investor groups include:
- Angel investors: This group typically invests in businesses at the very early stages before the company has gotten off the ground. This can be helpful for businesses that are not yet able to demonstrate the growth that other investor groups may need to see before offering funding. In addition to money, angel investors often offer mentorship and sound business advice based on their experience, which can be invaluable to many small-business owners.
- Venture capitalists: Unlike angel investors, venture capitalists invest in businesses that are on an upward trajectory and can showcase their growth in the market. Typically, venture-capitalist firms focus on specific industries like tech or real estate, so they bring highly specialized knowledge to the table. In exchange for capital, venture capitalists take part ownership of the small business with the terms based on the projected valuation of the company.
- Partner financing: In this case, a larger and more successful company provides capital to your small business in exchange for equity or another benefit, such as access to staff, products, IP and more. Sometimes, the deal is royalty-based, where the partner receives a percentage of every sale made. Partners can offer industry-based advice to help small businesses grow.
- Convertible debt: This can be arranged with different kinds of investors. In this scenario, a small business borrows money from an investor group, and the agreement includes converting the debt to equity sometime in the future. The agreement outlines a set rate of return for the investors with an agreed-upon date for converting the debt into equity. It’s a good way to maintain cash flow in the short term.
Trying Traditional Lending Institutions
If your business has a good credit report and collateral, then borrowing money from a bank may be a good option. Keep in mind that in order to qualify, you will need to have enough assets. The interest rates for your loan will vary depending on a number of factors, such as the financial status of your business, the lender with whom you’re working and the kind of business loan you’re receiving. With traditional banks, annual percentage rates range from 4% to 13%.
The U.S. Small Business Administration provides assistance to small businesses trying to get loans from traditional banks. This helps to make the lending rates more competitive, as the SBA loans provides lenders a guarantee. Keep in mind that the application process is complex and requires filling out a lot of forms.
Credit unions are another option for small businesses to receive business funding. In order to get funding, you may have to join the credit union as a member. Similar to banks, the annual percentage rates for credit unions are between 4% and 13%.
Seeking Funding Online
Online lenders are alternative lenders that can provide your businesses with funding. Unlike traditional banks or credit unions that focus on your credit rating, online lenders have more relaxed requirements. While traditional lenders require time and paperwork in order to provide funding, many online lenders can actually release funds within 24 hours.
However, because the eligibility criteria for acquiring a loan from an online lender is much lower than a bank or credit union, the interest rates are also considerably higher. Note that online lenders can have APRs that range from 7% to as high as 100%. These lenders are good choices for those who don’t meet the eligibility criteria of traditional lenders or for those who need access to capital right away.
Opting for Community-Development Finance Institutions
Community-development finance institutions are nonbank lenders that are mission-focused to improve local communities. They offer affordable lending to low-income or low-wealth people who are starting small businesses, micro-businesses, nonprofit organizations and more. The goal of these types of lenders is to boost economic growth and job creation in local communities.
This kind of lender is a good choice for those small-business owners who do not have enough assets or collateral to qualify for a traditional bank loan and for those who do not want to pay the high interest rates of online lenders.
Using Crowdfunding to Grow Your Business
Crowdfunding is increasing in popularity because it enables small businesses to raise funds from a large group of people. There are several crowdfunding platforms available, each with unique terms and conditions. In some cases, companies offer equity in exchange for funds, whereas in others, businesses offer special perks like exclusive access. Keep in mind that some platforms require businesses to raise the full financial goal in order to keep the funds raised.
Popular crowdfunding platforms include:
- Kickstarter (average $5,000 raised): This platform only accepts projects that are artistic or creative, and only 60% of projects are accepted by Kickstarter. Once accepted, the campaign includes a fundraising page that showcases the funding goal, a short video about the venture and a fundraising deadline, which is usually 60 days. The campaign needs to offer contributors a perk, such as a special thank you or a product prototype, and if the funding goal is not reached by the deadline, then the company does not receive the funds. If successful, the business pays 5% to Kickstarter and 3% to Amazon Payments.
- Indiegogo (average $15,000 raised): This platform accepts almost any kind of project, but the downside is that businesses compete with hundreds or thousands of other initiatives. The campaign includes a fundraising page, video and deadline, which can be up to 120 days. Unlike Kickstarter, the business keeps whatever is raised, even if it doesn't meet the fundraising goal. Indiegogo takes between 4% and 9% percent of the total plus there is a processing fee of 2.9%.
Profounder (average $29,000 raised): This platform is specifically for entrepreneurs with large investor networks. It’s not to be shared with the general public due to U.S. Securities and Exchange Commission
rules. In return for their funding, investors get equity in the company or a share of the revenue. The platform provides thorough guidance on how to raise funds, from creating pitches to calculating dividends.
Keep in mind that in order for your crowdfunding campaign to succeed, the pitch needs to be enticing to large groups of people. If no one takes notice of your crowdfunding campaign, it’s unlikely that you’ll reach your financial goals.
Finding Industry Grants
Many nonprofits, government agencies, small-business organizations and corporations offer grants to help entrepreneurs start and grow their business. This is especially beneficial because small businesses don’t need to worry about paying back a loan with interest or giving up equity in the company. However, the competition to get a grant is high. In some cases, grants are only open to specific groups of people, such as women or veterans.
Sources for small-business grants include:
- Small Business Innovation Research
- Small Business Technology Transfer Program
- Economic Development Administration
- National Association of the Self-Employed
- Wells Fargo Community Giving Grants
- The InnovateHer Challenge
- Open Meadows Foundation Grant Program
- The StreetShares Foundation
- Minority Business Development Agency
- Global Innovation Exchange Funding Database
Relying on Small-Business Credit Cards
Having a small-business credit card is useful for many businesses because it not only provides much-needed funds but it can also come with perks and rewards. Having a card for your business is also a good way to ensure that your personal spending and business spending are always kept separate.
When searching for a credit card for your business, make note of your funding goals. For what do you need the money? If you’re constantly traveling, for example, then getting a card with good travel points will be beneficial to you. If you spend a lot of money on office supplies or groceries, for example, some cards offer cash back on specific categories of purchases.
Keep the annual fees in mind, as the benefits need to be bigger than that expense. Note that for most small-business credit cards, you have to sign a personal guarantee. This means that you will be held personally liable for any debts on the credit card. This can also affect your personal credit score.
Popular small-business credit cards with beneficial perks include:
- Ink Business Preferred credit card is a great choice for frequent travelers and those that want ongoing rewards. It has a low annual fee of $95.
- Discover It business card provides small-business owners with 1.5% cash back on all purchases. There is no annual fee.
- The Plum card from American Express is good for businesses that have inconsistent cash flow but high working capital. There is an annual fee of $250.
Considering Funding From Friends and Family
Many small businesses consider asking friends and family for loans or investments. One of the advantages of using your personal network to raise business funding is that it shows outside investors that your personal connections believe in your business enough to risk their money for it. If your personal network has business experience, you can also rely on them to offer business advice. In many cases, they may be more lenient than traditional investors if your business has a few bad months.
On the other hand, you may lose friends and family members if they have lost a considerable amount of money on a failed business initiative. When seeking funding from your friends and family, it’s best to always be clear about the risks involved and have a formal signed agreement outlining the terms of the investment or loan. Always be sure to explain how the funds they are giving you will be used.
- NerdWallet: Business Funding: Where to Get Financing
- Business News Daily: Small Business Financing Options Without a Traditional Bank
- Float: 5 Most Common Reasons Businesses Seek Funding
- U.S. Small Business Administration: Loans
- NerdWallet: 14 Best Small Business Credit Cards of February 2020
- Inc.: Comparison of Crowdfunding Websites
- Opportunity Finance Network: What Is a CDFI?
- ValuePenguin: Average Small Business Loan Interest Rates in 2020: Comparing Top Lenders
- Forbes: The Right Way To Get Funding From Family And Friends
- Entrepreneur: The Ins and Outs of Raising Money From Friends and Family
- Digital.com: 32 Grants for Small Business: How To Apply Startup Funding In 2020
Anam Ahmed is a Toronto-based writer and editor with over a decade of experience helping small businesses and entrepreneurs reach new heights. She has experience ghostwriting and editing business books, especially those in the "For Dummies" series, in addition to writing and editing web content for the brand. Anam works as a marketing strategist and copywriter, collaborating with everyone from Fortune 500 companies to start-ups, lifestyle bloggers to professional athletes. As a small business owner herself, she is well-versed in what it takes to run and market a small business. Anam earned an M.A. from the University of Toronto and a B.A.H. from Queen's University. Learn more at www.anamahmed.ca.