If every business idea was easy to get off the ground, life as we know it would be very different. However, for most budding entrepreneurs, small-business funding remains an obstacle. First, you need to do market research to understand how much money you need to secure in order to make your new business a success. Next, you need to choose which small-business funding options to pursue.
Fortunately, many types of funding exist, from small-business grants to loan options to crowdfunding. However, you need to prove to most lenders, investors and financial institutions that you are fiscally responsible and have a solid business plan that will generate enough revenue for the funds to be recouped. In most cases, this means having a business plan (including a projected financial statement) drafted and ready to present, a good credit history and possibly even some prior business experience or credentials.
If you have bad credit, no business experience and a business plan that relies heavily on hopes and dreams, you may want to go back to the drawing board before applying for loans from traditional banks. However, you might still have a chance with alternative lenders. It all depends on your unique situation and with whom you connect.
Angel Investors and Peer-to-Peer Lenders
Investors, also called venture capitalists, are wealthy individuals (and sometimes businesses) who fund promising small businesses. Their goal is to ultimately earn money on your small business, so they will typically become a shareholder or own stock in your company. Because investors do intend to make money, you may have a greater chance at catching their attention if you can demonstrate high market viability and a chance for the investor to triple the investment in the first few years.
Angel investors are a subcategory of investors who want to give financial support to a particular microcosm of small businesses that they hold near and dear or simply find intriguing, even if other investors aren't impressed with the potential returns. For example, there could be a millionaire with a sweet tooth who funds nearly every candy startup that comes into view. It's worth networking and researching to discover the angel investors in your target industry.
Finally, peer-to-peer lending platforms allow people who aren't necessarily wealthy to fund startups. Think of peer-to-peer lending as the precursor to crowdfunding sites like Kickstarter. You may need to pay an upfront fee to use the platform and fill out an application similar to what's expected in order to get a bank loan. However, the interest rate will typically be lower than that of a bank loan.
Small-Business Funding Through Loans
Securing small-business funding through a bank loan is a traditional method but is not always ideal for people who are brand new to business. The bank needs your business to succeed in order for it to recoup the funds and collect interest. Therefore, banks have a reputation for having a rigorous business-loan application process, in which you'll need to present your business plan for consideration.
You can also approach your local credit unions about small-business loans or try for a Small Business Administration loan. The Small Business Administration's Community Advantage Program offers loans up to $250,000 to qualified candidates who can demonstrate an excellent track record of financial responsibility (including a personal credit score of over 700) and who can submit a business plan that passes all levels of scrutiny. Getting approved for an SBA loan is an achievement in itself thanks to the high standards and requirements.
You might qualify for a microloan from a nonprofit organization. Some foundations exist with the sole purpose of providing startup funds to people with a great business idea but few traditional financing options or historically low representation in business. Nonprofit microlenders may focus on serving a particular geographic area, minority group, women, veterans, etc. A microloan is typically no more than $50,000 and has a low interest rate.
Business Credit Cards
You wouldn't hesitate to use a credit card to finance a major and necessary purchase in your personal life, so why not use one to get your small business up and running? If you're dedicated to making monthly payments and pay close attention to changing interest rates, then a credit card is a relatively straightforward financing option.
It's easy to get approved for a credit card (no business plan required), but when it comes to funding your small business with one, you'll want to be choosy. Look for business credit cards with a manageable interest rate and some sort of cash-back or rewards program as an extra perk.
Crowdfunding platforms like Kickstarter and Indiegogo can help you raise funds from many individuals, gauge the market reaction and conduct early-stage advertisements all at the same time. Because crowdfunding is for online lenders, it helps to have a target audience who spends time on social media and will therefore easily help you share your page and collect more funds.
Although the terms and conditions may vary based on the crowdfunding platform you choose, individuals often feel good about lending through them because their money is only withdrawn if the startup meets its funding goal. That means if your crowdfunding effort is a flop, you don't have to worry about returning anyone's money. However, if your venture is a success, you can use the money without having to pay it back.
You can also set up perks and rewards for people who give certain amounts of money, share video updates and send email blasts to followers. Crowdfunding platforms are best used in conjunction with a website and/or social media pages. Think about it this way: Your website is your business plan, and your potential customers are your investors. Make sure you share convincing, professional and compelling content to win them over!
Issuing Stocks and Shares
If you decide your target market doesn't spend enough time on social media to warrant a crowdfunding campaign, consider selling company stock or shares instead. Issuing equity capital allows you to raise funds from multiple individuals or entities without the burden of needing to pay anyone back, even if your company fails.
Different types of stock or shares exist, and the buyers sometimes get voting rights in your organization. You also need to have a particular business structure in order to sell shares. Established businesses may experience greater results than a startup when it comes to selling shares, but there's no reason you can't use this method to fund a new business.
Personal Funding Options
Maybe you already have some personal savings built up that you'd like to use, but you should proceed with caution. Are your savings funds already earmarked for things like retirement, emergencies or your child's college tuition? What are the consequences of using it for funding your startup, especially if your startup does not break even? You may have some wiggle room, such as using a rollover for business startups to use retirement savings as startup funds, but tread carefully if you decide to dip into your personal savings fund.
When done with care, you can secure the funds you need to get your business up and running thanks to the generosity of your biggest supporters. The key is to treat your friends and family and their money with the same respect as a large financial institution. This means paying them back in a regular, timely manner and pitching your business idea for their consideration rather than expecting them to hand over a check. Write a promissory note to make their loan official.
Merchant Cash Advance
A merchant cash advance is one way to get a lump sum for your small business without worrying about having to immediately make monthly payments. That's because a merchant cash advance works by taking a percentage out of your future credit or debit card transactions. While it might seem like an excellent solution right now, be sure to find one with terms that won't eat too heavily into your bottom line once you do start making sales.
Home Equity Line of Credit
You might already own a significant chunk of money that just hasn't been liquidated yet: your home equity. A home equity line of credit lets you dip into the portion of your home's mortgage that you've already paid off. For many people, that's easily tens of thousands of dollars.
Despite the crossover into your personal life, there are no rules dictating for what you can or cannot use your HELOC. Use it to finance your small business and recoup the funds as your profit margin grows.
You'll still need to make monthly payments with this financing option even though you're using "your" money. Fortunately, a HELOC has a lower interest rate than many other lines of credit. You don't need to have a perfect credit score to qualify for a HELOC, but one above 620 is ideal.
Applying for Business Grants
Wouldn't it be great to get money for your small business but not have to pay it back? That's the allure of business grants, which are available from both the government and nonprofit foundations. Of course, everyone in the business world is attracted to grants for the same reason, which means you have to put your best foot forward in order to have a fighting chance.
If you have the qualifications, credit score and business plan to impress the toughest investors, you're also a good candidate to apply for a business grant. Just like some microloans, some grants are available only to applicants who meet particular demographic or niche requirements. With hundreds of options available, it's worth taking the time to research and apply for grants about which you feel pretty confident.
Entering Business Competitions
If you're confident that you have a stand-out product and the charisma to sell it, consider entering a business competition. They don't all play out like "Shark Tank," but the idea is basically the same: If you can impress the judges, you can walk away with the prize money, and it's not nickels and dimes!
The downside of business competitions is that months can pass from the time you apply to the moment the winners are announced. Be sure to diversify your funding options in the meantime.
Reinvesting Profits Into Your Small Business
Regardless of how you ultimately find small-business funding, create a plan for reinvesting a percentage of profits back into your business. Whether you focus on increasing marketing and advertising or choose to open a new location, growing your business can help you make more money to repay loans and increase your company's financial stability. With a positive financial track record established, it will be easier to secure additional funding in the future if you have big plans for expansion.
- YouTube: FitSmallBusiness: 9 Startup Funding Options - Business Loans + More
- Fundera: Microloans: The 6 Best Microlenders for Small Businesses
- Investopedia: Angel Investor
- Debt.org: Peer-to-Peer Lending
- The Points Guy: Key Differences Between Business and Personal Credit Cards
- ShopKeep: The Difference Between a Merchant Cash Advance and a Loan
- Investopedia: Top Two Ways Corporations Raise Capital
Cathy Habas specializes in marketing, customer experiences, and behind-the-scenes management. Cathy has contributed to sites like Business and Finance, Business 2 Community, and Inside Small Business. She served as the managing editor for a small content marketing agency before continuing with her writing career.