17 Ways to Finance Your Small Business
Financing a new business can be extremely challenging. You must secure enough capital to purchase everything you need to begin offering your product or service—from a physical location, to a website, to office supplies and advertising. However, it’s often how you go about getting that money that can make a huge difference in whether your business ultimately succeeds or fails.
Fortunately, there are many different small business financing options available, enabling you to select the one that makes the most sense for you and offers you the greatest chance of success. To help you make that decision for you and the company you want to get off the ground, here are 17 small business financing options to consider.
Crowdfunding is a fairly new way to raise money, but it’s one that plenty of entrepreneurs have already used with great success. If you’re not familiar with this concept, it involves posting your idea online and setting financial goals that must be met within a specific timeline to bring your idea to life. This gives the general public the opportunity to pledge their own money to help you meet these goals, subsequently making your business dream possible.
While some people choose to donate simply because they believe in your product or service, others need a little incentive to part with their cash. That’s why some funds-seeking entrepreneurs offer enticements, such as free products and other perks, once the business is up and running to attract more donors.
Because there are a variety of different crowdfunding sites from which to choose, it’s important to select the one that can potentially bring about the best results. The most highly recommended crowdfunding sites include but are not limited to:
- Kickstarter - With more than 12.5 million financial backers providing more than $3 billion to date, this site offers emerging entrepreneurs a large pool of potential supporters (and money) for a variety of “creative projects.”
- GoFundMe - While Kickstarter has guidelines about what you can raise money for, GoFundMe doesn’t appear to have the same constraints. This allows you to request financial support for more types of business needs.
- Indiegogo - The nice thing about Indiegogo is that this platform was created specifically for entrepreneurs intent on starting their own businesses, which means that your campaign should be more tailored to individuals in your current position.
- Fundable - This crowdfunding platform was also designed with the small business owner in mind. It provides the opportunity to seek support from investors who are more likely to appreciate your exact needs.
2. Small Business Grants
The great thing about small business grants is that you don’t have to pay them back. Once you receive the money, it’s yours to use to kick off your small business plan (within the parameters of the grant, of course). It just takes a bit of searching on your part to find one that is a good fit. Not to worry, though, because there are many good resources available to help.
For instance, for research-based grants in your area of business, the U.S. Small Business Administration offers Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) grants, both of which may be helpful. And if you’re a woman intent on owning a small business, there are grants designed specifically for you.
3. Angel Investors
An angel investor is someone who provides financial backing for entrepreneurs and small startup businesses. This person is often a former entrepreneur or professional themselves, and they provide new businesses with more than just financial assistance. They can also give business-related guidance and offer connections to their own valuable resources and contacts.
To increase the likelihood of gaining funding from an angel investor, it’s necessary to know your business inside and out while also having a solid business plan. As you’re going through this process, it’s important to be truly passionate about your business so you’re able to convey that passion. When presenting your business, you should also avoid jargon and be succinct so that your potential investor is completely clear on your wants, needs, and goals. If you’re not sure how to locate an angel investor to help finance your new small business, one option is AngelList. This website makes it easier for angels to invest their money in new startups like yours, giving you both the opportunity to build your company.
4. Venture Capitalists (VC)
A venture capitalist is an investor who, in part, provides capital to startup ventures largely because they stand to make money if the company becomes successful. So, how is a venture capitalist, often referred to as simply a VC, different than an angel investor? VCs are typically more involved in the business (sometimes requiring a board seat) than angel investors. They also tend to put up more cash—typically in the millions—and take longer to secure because they require a greater amount of time when evaluating the risks associated with funding the new venture.
If this option sounds appealing to you, it’s important to find a VC with complementary goals and management styles to yours, because you’ll be working closely together. It’s also important to select one with a good reputation, especially for helping out when the going gets tough. You’ll also want to arrange for an in-person meeting, during which you should be honest about the financial risks you (and they) will face, offering ways to reduce them up front.
5. Family and Friends
Another common way to finance a small business is to ask for help from family and friends. As your biggest supporters, they often take less convincing than an angel investor or VC because they already know what you’re capable of and they want to see you succeed. When approaching a loved one for help financing your small business, be sure to have a formal business plan in place before you start asking for money. Also, know the amount you need and where and how you intend to spend it. Be ready to share this information, because it will show your family member or friend that you won’t mismanage their money should they decide to give or lend it to you.
It’s also crucial to keep in mind that borrowing money from people you have personal relationships with can impact how you get along. Instead of being someone you just laugh and joke with or attend family gatherings to see, they become a creditor to your business. This changes the dynamics and has the potential to create personal issues, so be aware of this before entering into this type of relationship.
6. Factoring (Invoice Advances)
Factoring can be a cost-prohibitive way to raise funds for a business and is often used by those with poor credit. What is factoring? It basically involves selling your receivables (your open invoices) at a discount to get up-front cash, similar to how cash advance companies pay a discounted amount today for a paycheck or money payout you’re due at a later date.
Companies that choose this method of cash advancing generally pay a fee, or a percentage of the total amount due for the open receivables. Because this means that you’re giving up a portion of the monies due owed to you, this isn’t always the best option. However, if you’re having difficulties financing your small business, it’s worth considering.
7. Your Personal Savings
If you have a large sum of cash sitting in your savings account, then it may be possible to finance your small business venture yourself. This enables you to start your company without owing anyone else. It can also save you a lot of interest along the way. Should you decide to take this route, it’s critical that you don’t cut yourself so short that your family suffers if an unexpected expense arises. For this reason, always keep enough in your account to survive car and home repairs, unforeseen medical bills, and other similar emergencies.
8. Your 401(k)
When deciding how to get financing for your small business, you have the option of looking no further than your 401(k). Similar to the funds existing in your own personal savings, this money is yours, too. That means you don’t have to worry about paying back any interest or owing an outside person or entity.
While the steps for getting money from your 401(k) are fairly simple, they are also legally complex. It’s important to remember that taxes and early penalties may apply if you’re younger than 59-and-a-half years old. Therefore, you’ll benefit from finding someone who has experience with this process.
9. Your Life Insurance Policy
As long as your life insurance isn’t a term policy, you may be able to borrow against its cash value, giving you the money you need to finance your small business. Every policy is different, though, so you’ll need to read yours thoroughly to know how taking this action will affect the payout should something happen to you before it’s repaid.
10. A Traditional Bank Loan
With the current economy, it’s becoming increasingly more difficult to get a bank loan than it was in the past. However, it’s still an option to consider, so no article about how to finance a startup or new small business would be complete without at least mentioning it. While lending standards are much stricter than they once were, many banks still have extra funds set aside for small business lending. And quite often, they have a lower APR (annual percentage rate), meaning less money to pay back than some of the other loan-based options.
Other things to keep in mind when obtaining a traditional bank loan include: A good credit score - which is generally 700 or higher, depending on the credit bureau Collateral - which you can use against the loan Patience - because traditional business loans can easily take up to six months to secure
11. A Small Business Administration Loan
The U.S. Small Business Administration (SBA) offers new small businesses a variety of loan-based financing options, though there are a few qualifications to consider. For instance, some SBA loans are only given to businesses that are unable to obtain the money they need through other means. Additional criteria may apply, depending on the type of loan being applied for.
When applying for an SBA loan, it’s critical to provide all of the requested information and documentation, making it easier for them to say yes. To help with this, the SBA has created a Loan Application Checklist.
Some of the included items are as follows:
- Your Profit and Loss (P&L) Statement
- Your original business certification or license (if applicable)
- Your personal resume
- A business overview and history
12. A Home Equity Loan
If you have owe less on your home than it’s worth, a home equity loan could provide the financing you need to fund your new business venture. In this case, your home becomes the collateral needed to secure the loan.
While this option can help you get your business, it’s important to realize that, should it fail, you could lose your home in addition to losing your business. That makes this a slightly less appealing finance-securing alternative, especially if your house payment requires your income.
13. Your Credit Card
Although this is a risky option, if you have a large line of credit available on one of your credit cards, you could potentially charge everything you need to get up and running. Just make sure you’re able to make more than the minimum monthly payments or else you’ll spend years (if not decades) paying if off. Also, if the card has a high interest rate, you may pay more in the end than you would on a traditional or SBA loan.
There are some cards that offer 0 percent interest, which may make this a choice to consider, especially if you are expecting enough cash to come in to cover the charge in the upcoming months. This can allow you to get moving on your business now, while still paying off your balance before any interest can accrue.
14. Pledge Future Earnings
Are you pretty confident that your business will not only survive, but thrive? If so, you can pledge part of your future earnings in exchange for some monies up front. In other words, if someone gives you money now, you can pledge your future earnings and agree to give them a certain percentage of what you’ll make in the future.
The most obvious drawback to this approach is that you stand to lose a lot more than you gained, particularly if your small business is as successful as you’d like. There’s also the question about whether this option is legal or enforceable, making further research necessary if you want to give up your expected earnings in an attempt to get your new business venture started.
15. Seller Financing
If starting your new business involves buying an existing business, you could finance the venture directly from the seller. According to the Maryland Small Business Development Center, “The simplest way to provide seller financing is to have the buyer make a down payment, with the seller carrying back a note or mortgage for the rest of the purchase price.”
This option provides some security for the seller, because if you default, they regain control of the property by way of a lien. Plus, the assets of the business can be used as collateral, making this an appealing option to both of you as long as you agree on the terms.
This is one of the lesser-known small business financing options, but a warrant is a security that enables its owner (your investor) to buy future stock in the company for an amount less than its current market value. This provides your startup with long-term financing while offering the warrant holder with the opportunity to make good money with minimal risk.
The down side for the warrant holder is that they gain nothing if the warrant amount is higher than the stock’s current price. But if you find warrant-holders willing to take this risk, then you can potentially finance your new business using this sole method.
17. Alternative Capital Sources
When it comes to small business financing and short-term loans, another viable option is to seek alternative capital sources, such as those offered by BFS Capital. These types of loans can range from $4,000 to $2 million, and are commonly called microloans. They can help you overcome some of the most common obstacles associated with getting your company plans moving along.
These obstacles include having imperfect credit or not wanting to wait the standard length of time it often takes to secure a traditional bank loan. In fact, going through an alternative capital source can give you access to the cash you need to start building your business in just days versus the all-too-common weeks associated with most business loans.
The way alternative capital sources work is they look at the health of your business right this moment. They then use this information to determine whether giving you a loan will help you grow.
(To learn even more about the benefits of this particular capital-raising option, read “3 Little-Known Facts of Business Financing” and “Small Business Financing: Understanding Your Options.”)
There are many different ways to finance a startup business and, with enough determination and hard work, that is exactly what you can do. To learn more about the various funding options available to up-and-coming small business owners, here are a few more resources available online: