ooking for small business financing ideas? You’re in the right place. When starting a small business, getting the correct amount of capital can determine the success (or failure) of your business.
But where do you even start? The industry can be competitive and overwhelming, but don’t worry. It is possible to get your business funded without a boatload of extra stress. There are several ways to fund your small business’s startup, expansion, and cash flow. Let’s take a look at a few.
11 Ways for Small Business Financing
When it comes to small business financing, there are a few options out there. Some of them are more accessible than others, and some have a higher chance of success, but only you know what will work for your business.
Entrepreneurs that use “bootstrapping” begin their company with few outside resources. The funding comes from personal capital, such as asset sales, savings, credit cards, or small loans.
It’s a very lean business style since you’ll be on the lookout for deals and discounts at every stage.
Nikki Larchar and Tina Todd “bootstrapped” their organization, SimplyHR. They pooled their financial and personal resources to create a business from the ground up.
Now, they attribute their ability to earn a profit within a year of launching to this minimalist approach. “Being able to expand the business the way we want to grow it, without having a looming loan over our heads has been tremendous for us,” Nikki Larchar said.
However, the term “bootstrapping” comes from a proverb used in the Old West. The phrase was “pull yourself up by your bootstraps” and it was used to describe a task that was impossible without help. (After all, how could you pull yourself UP by your own boots?)
This option is attractive but may prove difficult, especially as you run into unexpected costs.
Pro: You won’t have to start your firm in debt.
Con: You need some degree of personal funding to make this feasible.
2. Crowdfunding Platforms
Instead of going to a bank for money, entrepreneurs and small business financing owners conduct a 30-day fundraising campaign to find investors for their firm or project. Individual investors are usually rewarded with a gift, product discount, or (in some cases) equity in the company.
Last year, Larcher raised $10,200 on Kickstarter to create a comic book that HR departments could educate staff about sexual harassment policies. They achieved their target and began operations in January 2019.
“We were able to totally immerse ourselves in the project a lot faster than we would have been able to otherwise,” she says.
Pro: You can raise funding while generating publicity for your company.
Con: There’s no assurance that you’ll meet your financial target.
3. Product Pre-Sales
If you own a small business that aims to sell products, holding a pre-sale where clients pay for goods in advance is a simple method to raise money. The money you receive can be used to fund the production of the first batch of products by the business owner.
Kedma Ough – the statewide creative director for America’s Small Business Development Centers in Oregon – says, “product pre-sales is an outstanding plan as you have just shown that the clients want your product.”
All you need is some kind of prototype that customers can see and a site to facilitate the sales.
Pro: Product pre-sales can help you with some of the upfront costs of product development.
Con: For service-based firms, this is not a realistic solution.
4. Friends and Family
Friends and relatives may be a potential source of financial capital for your small business… if you’re brave (or reckless). If your business fails or goes bankrupt, your personal relationships may be torn apart.
Kedma Ough has seen several cases where family members stopped communicating because they invested in the business and things went wrong. “It doesn’t mean [this funding] won’t work,” she adds, “but I’ve seen so much in my life to know it will crush your heart.”
Pro: It’s simple to get there, and you leverage existing connections.
Con: If the business fails, it may harm relationships.
5. Partners and Their Crucial Role in Small Business Financing Ideas
Taking on a business partner as a way to get capital in exchange for equity in your firm can be a smart move. It depends on the arrangement. Is the partner an employee? Just an investor? Some in-between?
If you’re thinking about bringing on a partner, make a detailed outline of the business relationship, preferably with the assistance of a lawyer. Define and specify expectations and boundaries for what each partner can expect while running the company, as well as worst-case scenarios for how the company would dissolve if one partner dies.
Pro: Partners can provide money and business assistance without relying on relatives.
Con: To avoid disagreements, all partners must have well-defined, legally-backed roles and expectations.
6. Small Business Grants
Grants for small business financing are available from various sources, including government agencies, nonprofit organizations, and for-profit companies.
The eligibility conditions for government agency grants are usually the most stringent. They usually focus on businesses in the scientific, technological, or energy spaces, as these directly benefit the community.
Priyanka Prakash, a senior writer at Penny Calling Penny, says, “Government grants aren’t something that most of the smaller enterprises can obtain funding through. However, if you believe you match the standards, invest time putting up the application materials because if you win, you get free money, which is a fantastic way to get started.”
Nonprofit organizations may be looking to help people without access to typical funding, such as minorities, veterans, or women.
For-profit organizations’ grants frequently have the broadest qualifying conditions, and they may be awarded based on merit or by filling out an application.
Pro: Small business grants don’t need to be repaid.
Con: The market for these grants is very competitive.
7. Angel Investors
Does the thought of having a healthy investor step in and support your business sound like an answered prayer? That’s where “Angel” Investors come in. Affluent groups or individuals that invest in growing companies are known as Angel Investors.
P. Simon Mahler, a small-scale business tutor with Score, says that people can look for angel investors by industry and area. One option is to browse the Angel Capital Association’s national directory.
Once you’ve found a possible investor, you’ll go through a lengthy, in-depth interview process. Their entire team will usually join in the process to check for risk.
“They’re quite cautious and selective about who and why they invest in certain businesses,” Mahler explains. “They want a safe bet.”
Pro: Having a benefactor can help with financing issues.
Con: Obtaining funds might be a lengthy and complicated procedure.
8. Venture Capital
Venture capital firms, like angel investors, invest in small businesses and startups early in their development. The difference is how quickly they work and what they want in return.
Mahler, Investment Manager at Signals Venture Capital, says that organizations are highly particular in what they invest in. Once they decide to invest, though, they’re aggressive. Angel investors, for example, may guide via exchange for cash. Venture capitalists often demand equity in your company as well as specific adjustments to your business strategy.
Mahler says, “You’re giving away a lot to obtain a lot… It’s the thing where people will struggle a lot: it sounds fabulous to have VC (venture capital) money, but you are giving up a crucial portion of your company’s ownership stake.”
You can initiate VC funding by asking your network for personal guidance if you think your company would be of interest to other companies. You can also build a profile of your company on AngelList, a national marketplace for startups. It’s frequented by entrepreneurs, venture capitalists, and angel investors.
Pro: Obtaining considerable sums of money faster than employing an angel investor.
Con: To acquire the funds, you may have to give up a crucial part of your position.
9. Online Alternative Lenders – Essential Small Business Financing Element
Instead of traditional bank loans, online alternative lenders have become a favorite company choice of funding. Alternative lending sites like Kabbage, OnDeck, and BlueVine are handy and quick methods to borrow money.
You don’t need to visit a bank to apply for loans – everything is online. If approved, those funds are available within a few working days. Like banks, they offer business lines of credit, giving some flexibility with how much debt you take on.
These lenders do have the disadvantage of being a costly way to borrow money. According to Prakash, a bank loan may have an interest rate of 7% to 8%. However, these online lenders may charge up to 60% to 70% interest. She says, “It is obviously a trade-off between how good or bad you require the financing vs. how much you are likely to pay for it.”
Pro: Simple application process, quick funding.
Con: High interest rates are a disadvantage.
10. SBA Loans
The Small Business Administration of the United States has a program to assist entrepreneurs after a period of success. SBA loans are backed by an assurance that the loan will be repaid. If the company defaults on the loan, the government will reimburse the lender.
Prakash explains, “It is a process to vanish some of the problems of the lender. Also, it encourages banks to lend more to small businesses.”
Pro: If you can’t repay the loan, it relieves the pressure on the small firm.
Con: Startups may find it challenging, especially if they don’t yet have proof of success.
The most obvious place to secure a business loan may not be the best place to go.
Traditional banks want to be sure they’ll receive their money back, so they’ll only engage with what they deem to be a safe bet. This means that banks might not approve you for a loan till you’ve been in business for many years or can prove you’ve started other successful businesses.
Pro: Interest rates are lower than those offered by online lenders.
Con: Newer enterprises or startups will likely be rejected.
What if You Have a Lousy Credit Score to Start a Small Business Financing?
There is still hope for folks with a poor credit score to start a small business. Bank and SBA loans may be out of the question at first, so you may have to rely on alternative funding sources.
If you do apply for a loan, you may have to pay more in the short term due to high interest rates. These interest rates are a way for the bank to recoup some of the risks they took on your business, but paying them off immaculately can boost your business’s credit score (though probably not your personal credit score).