Guide To Starting A Business

7. Funding Your Small Business: How to do It

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Running A Business

Funding Your Small Business: How to do It

Mar 18, 2023 • 9 min read
Profesional Tips to obtain business funding
Table of Contents

      As a small business owner, there are many challenges you may face on a day-to-day basis. Accessing the funding your company needs to thrive shouldn’t be one of them. 

      Nonetheless, a Federal Reserve study finds that around 40% of small businesses do not receive the full amount of funding they need when they apply for credit. Approximately 12% of small business loan applicants don’t qualify for any financing at all. 

      In light of these struggles, it’s no surprise that many entrepreneurs turn to methods such as bootstrapping or self-funding to finance startups, expansions, and other business-related goals. According to SCORE, a nonprofit organization powered by the U.S. Small Business Administration, the majority of entrepreneurs fund their new startups with personal savings. 

      Depending on your situation, however, relying on personal savings or loans from friends and family members may not be an option. And even if you have access to such resources, relying on personal funds or loans from loved ones comes with unique risks that could make them the wrong choice for you. 

      On a positive note, there are many ways to fund your small business. Read on for more information about five popular business funding options to consider if your company needs an injection of capital.

      1. Traditional lenders

      Traditional lenders, like commercial banks, local banks, and credit unions, are often some of the first resources that come to mind when an entrepreneur needs to borrow money for their business. When you seek financing from a traditional lender, your business may be able to apply for various types of business funding including a business loan, line of credit, and more. 

      There can be benefits to working with a traditional business lender. In some cases, you might be able to qualify for lower interest rates and higher loan amounts. On a negative note, however, traditional bank loans are often harder to qualify for in comparison to other types of business financing, especially if your business is in the startup stage or if you have credit challenges.

      2. SBA lenders

      Loans backed by the U.S. Small Business Administration (SBA) can be another useful resource for small business owners. SBA loans have a reputation for featuring lower interest rates and generous repayment terms. There are even some SBA startup business loans for eligible borrowers. 

      At the same time, SBA loans are known for their lengthy approval process. And qualifying for this type of government-backed loan can often be difficult and tedious. SBA loans can be a great option to consider if your business has good credit and can satisfy other eligibility criteria, but these loans aren’t right for everyone.

      3. Online lenders

      In recent years, online lending has seen tremendous growth in the United States. According to the Cambridge Centre for Alternative Finance, online alternative finance platforms issued more than $15 billion in loans to small and mid-sized businesses in 2019. 

      The Federal Reserve notes that the development of online lending fintech “has enabled small businesses to access credit in ways previously unavailable to them.” One reason this is true is because the qualification standards for online loans are, in many cases, easier to satisfy compared with traditional small business loans

      As a tradeoff for this easier-to-satisfy borrowing criteria, however, the cost of borrowing from alternative lenders can often be higher. Borrowers may pay higher interest rates and origination fees, depending on the type of funding. 

      Another benefit of working with online lenders to find funding for your small business is that there are many different options available. In addition to small business loans, you may be able to consider the following funding solutions depending on your company’s needs. 

      4. Investors

      Another possible way to secure capital for your business is by seeking outside investments from others. Below are three common types of investors that entrepreneurs may turn to for potential funding. 

      • Venture capitalists – If you have a business idea with high growth potential, you might have a chance of raising funding in the form of venture capital. In exchange for this type of investment, however, you should be prepared to give up equity in your business (aka a percentage of ownership) and perhaps a seat on the board of directors to the venture capital firm that supplies the funding.
      • Angel investors – An angel investor is another type of investor that might be interested in supplying capital to back the right kind of business idea. In general, angel investors are wealthy individuals who invest in startups in exchange for an ownership interest and (often) a leadership role in the company. In some cases, you may receive mentorship from an angel investor as well. 
      • General public – Many people associate crowdfunding with campaigns that seek donations to support a charitable cause. Yet there’s another type of crowdfunding that allows the general public to buy shares of privately held companies known as equity crowdfunding. According to SEC expanded limits, companies can attempt to raise up to $5 million through equity crowdfunding over the course of 12 months.

      5. Grants

      Small business grants are probably the most attractive funding option available to entrepreneurs. With grants, you don’t have to give up a portion of your company’s equity in exchange for an investment. There’s also no lender to repay for the capital your company receives. 

      Yet with great appeal comes great competition. Many small business owners can see the value in grants as a funding source. And grant distributors such as the federal government (Grants.gov), state governments, and private foundations have limited funds to distribute. As a result, you may find yourself in frustrating situations where a large number of entrepreneurs are applying for a small amount of funding. 

      If you plan to apply for grants, it’s wise to look for ways to help your business stand out from the crowd. It may also be helpful to expedite (and perhaps outsource) the grant application process when possible. As a business owner, your time is valuable and you should seek to use it as wisely as possible.

      Next steps

      There’s no one right way to seek funding for your business. That’s why many small businesses fund their goals through a combination of the methods above—loans, credit cards, grants, investors, etc. 

      Because there’s no way to know what the future holds, it’s wise to make your business as attractive as possible to potential lenders, investors, grant board members, and others in advance. When you make such efforts, you can improve your chances of qualifying for the funding your company needs. 

      Start by working to improve your credit—both personal credit and business credit. Lenders and investors may consider the condition of your credit to assess the risk of doing business with you. And since establishing good credit can take time, the sooner you begin working toward this goal, the better.

      Next, you want to make sure to create a solid business plan. A business plan can help you present your company and its goals to others and explain why investing in your business, loaning it money, or selecting it as a grant recipient is a wise choice.

      Finally, figure out how much your business can afford to borrow and your comfort level with taking on debt in advance. Avoiding debt altogether because you’re afraid to take a risk could hold your company back from reaching its goals. At the same time, overextending your business by taking on too much debt or putting personal assets at risk could be a mistake. (Tip: You can calculate the ROI for various financing options to make sure they’re a good investment for your business.)

      When it comes to working with potential investors, you’ll also need to determine what level of ownership and control you’re willing to give up in exchange for funding. Securing the capital your business needs to accomplish its goals is important, but you should only make decisions that you can accept without regret in the long term.

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      About the author
      Michelle Lambright Black

      Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. Founder of CreditWriter.com—an online community that helps busy moms take control of their credit and finances—Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many more.

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