For entrepreneurs, funding can mean the difference between success and failure when starting a new small business.
For beginners, it can be a daunting task to discover how and where to find additional capital. So where do you begin? There are several ways in which entrepreneurs can get money to fund the startup, increase daily operations, and cash flow for their new business.
Each approach comes with its own advantages and disadvantages of various factors like business maturity and the borrower’s credit history.
10 Ways To Securing Funding For Your Small Business
Below is a list of 10 ways to obtain new business financing for entrepreneurs. This ranking is based on accessibility, as some choices may not be open to business owners who have no previous experience.
Entrepreneurs start their companies using as little external resources as possible, such as loans, through bootstrapping. The funds come either from personal finances, such as the sale of assets, the use of loans and credit cards, or the use of business revenue once it has begun.
The funds come either from personal savings, assets from the sale of a property, using credit cards, or from the business revenue, once it has begun.
This is a very lean business strategy, as entrepreneurs seek the least expensive method of creating a viable product or service.
Nick Anderson bootstrapped his company by taking his finances and launching a successful advertising agency 3 years ago. He claims that bootstrapping his company rather than securing a loan is a major reason why he was able to make a profit within a year of operation.
Advantage: Does not start your business in debt
Disadvantage: Not an option if you are unable to sell assets or use personal savings
Because of the increasing popularity of sites like Indiegogo and Kickstarter, crowdfunding platforms have become a more mainstream way to profit on a venture, company or item.
Here’s how it works: Instead of going to a bank for money, entrepreneurs and small business owners create a 30-day fundraising campaign that seeks investors in the company or venture.
Business owners typically reward individual investors with a donation, consumer discount, or sometimes company equity.
Christopher used Kickstarter last year to raise $15,500 to fund a booklet that could be used by high school districts to teach students about sexual harassment. In December 2018, they reached their goal and opened.
Advantage: Can generate buzz while raising money for your business
Disadvantage: No guarantee to meet the desired goal of support
Holding a pre-sale in which customers pay for goods upfront is an easy way to acquire funds if you’re running a small business selling products. The business owner can use the money raised to support the manufacturing of the products.
Advantages: Could help offset some of the initial costs of producing the goods.
Disadvantages: Not a viable business-based alternative
Friends and Family
Friends and family may be a potential source of financial capital for your small business, but be warned: if the business does not make it or falls into difficult times, the personal relationship may be destroyed.
Advantage: Accessible instantly.
Disadvantage: Should the business fail, it will destroy the relationship/s
In return for equity in your company, taking on a business partner can be a way to secure funding. The partner may be an employee, someone not involved in everyday operations, or just an investor, depending on the arrangement.
Write down every aspect of the business partnership if you are considering taking on a partner, preferably with the guidance of an attorney. Define clear expectations and limits of what each partner should expect when running the business and the worst possible outcome of how the business will collapse in the case of a partner dying or choosing to be bought out of the business.
Advantage: Can provide funding and help with the business without family ties
Disadvantage: To avoid conflicts, both partners must have established roles and expectations
Small Business Grants
Small business grants come from a variety of outlets, including government entities, non-profit and for-profit organizations. Government agency grants appear to have the narrowest eligibility requirements, as they often concentrate on research, engineering and energy industries companies that bring direct growth to the economy.
Non-profit grants may concentrate on specific types of business owners, such as women, minorities, or veterans. Grants from for-profit organizations often have the broadest eligibility qualifications and can be granted based on merit or by fulfilling an application.
Advantage: Who is not in love with free money?
Disadvantage: Highly competitive
Just as the name suggests, it may sound like the answer to the dreams of an entrepreneur to have a wealthy investor come in and finance a startup. Angel investors may be wealthy individuals or organizations willing to finance startups.
People can look for angel investors by business and venue — one way is to access the Angel Capital Association’s national list of angel investors and businesses.
When you find a potential investor, making sure the business is viable is a lengthy, thorough process of interviewing the founder and the entire business team of that person.
Advantage: A benefactor can relieve stress with funding
Disadvantage: Slower process
Unlike angel investors, venture capital firms also provide early stages of development to small businesses and start-ups. The difference is their speed of operation and what they are asking for in return. But it comes at a price for that speed.
Michelle states that when angel’s decide to invest, venture capital firms are very specific in what they invest in and are aggressive. Angels can offer advice for their investment, for instance, while venture capitalists can ask for equity in your company and ask for specific changes in your business strategy.
“To get a bit, you give away a lot,” she says. “That’s what most people are struggling with is that getting VC [ venture capital ] money sounds good, but you’re giving away a huge chunk of ownership stake in your company.”
If you feel your company might be of interest to such companies, start by asking for personal advice from your network. You can also choose to create a profile on AngelList for your company — a national platform for job seekers, angel investors, founders and venture capitalists alike.
Advantage: It may be quicker when asking for a larger amount of money
Disadvantage: A big percentage of ownership will have to be given up in return for the funds
Online Alternate Lenders
Alternate online lenders have become a common business funding choice as opposed to capital from conventional bank loans. Online alternate lending firms, such as Kabbage, OnDeck or BlueVine, are a simple and fast way to receive the funds. No need to go to a bank to apply since everything is online and in a few business days, funds can be deposited.
Unlike bank and private loans, online alternative lenders offer credit lines where you can use as many or as few as you need under your limits instead of having one lump sum of money upfront.
But the downside of using one of these lenders is that an expensive way to borrow money can be to do so. Prakash says a bank loan’s interest rate may be 7%-8%, whereas online lenders may pay interest rates of up to 60%-70%.
Advantage: Quick method of request, faster way to access funds
Disadvantage: High-interest rates
The U.S. Small Business Administration has a program to help business owners get grants. They will lend funds as long as the business demonstrates a few of years of success. SBA loans come with a promise to repay the borrower for the loan. If the company fails to repay the loan, the government will pay the borrower, which might be a conventional bank, for instance.
The only drawback is that these loans for companies are rather hard to obtain. “If your company is a few years old and produces high revenue and is close to a profit, it is a much more viable option for a small business loan,” Martelli says.
To find out if you are eligible for an SBA loan, you can go to SBA.gov.
Advantage: Eliminates pressure from the small business if it is not possible to repay the loan
Disadvantage: It’s not easy for business owners to be accepted