You’ve a killer business plan, a great vision and supportive family members and friends. The next biggest thing that comes into the picture is financing. Financing is required to start a business, scale it up to profitability and even sail through a rough patch. Financing varies depending upon the size and type of your business. Some businesses like online ventures need a small amount of funding while processing businesses require a substantial amount of capital. Small business funding can be an uphill task to attain and sometimes, many small business owners feel like they’ve run out of options.
But in reality, there are various options to obtain financing, some of which you may not even know. It’s important to understand that putting all the eggs in a single basket is neither advisable nor an ideal business strategy. When you diversify the financing sources, you put yourself in a better place to get the appropriate amount of financing that suits your specific requirements. Keep in mind that financial institutions or bankers simply don’t want to see themselves as your only source of funds. When you’re able to show that you’ve used or sought different financing options, the lenders understand that you’re actually a proactive entrepreneur. However, your options for obtaining finance are no longer limited to seeking help from family or friends, approaching your bank manager or re-mortgaging your house.
If you think that you’ve explored all these options and yet came back with empty hands, comb over these 15 sources described below and dive deeper into the options you’ve not tried.
- SBA Loans
SBA has grown substantially in terms of providing complete assistance when it comes to arranging finance for small businesses. It provides a wide array of programs tailored to support small businesses in every field. Its programs include management assistance, federal and financial contract procurement assistance and specialized outreach to minorities, women and armed forces veterans. It also provides loans to the victims of various natural disasters and specialized advice as well as assistance in international trade. It’s important to note that SBA doesn’t lend enterprises the money. Instead, it backs a bank that makes the loan. This means if you are looking for a business loan for your small business and fail to qualify for a conventional bank loan due to different reasons – insufficient years in the business or unavailability of collateral, the government can help. SBA offers different kind of programs and qualifications for each program are specific. It can help you obtain a loan from a third party lender, find venture capital, or guarantee a bond. Currently, the top three SBA lenders are Wells Fargo, US Bank and Live Oak Bank. Almost every lender throughout the country participates in the SBA programs. Your local SBA office can recommend you to some local lenders who’re participating in the program, or you can contact any SBA loan provider who works at the national level.
- Small Business Grants
There’re various ways to explore when you’re trying to raise fund for your small business. You can pitch an investor, leverage your own assets, or apply for a loan, just to name a few. Another option is to apply for a small business grant. A grant sounds quite lucrative for small business owners because it’s free money. They come with no interest rates or repayments, no hassle, no credit score but unfortunately finding a small business grant isn’t that easy. The main two main obstacles are – they’re extremely difficult to locate and often hyper-specific in nature. However, if you think that your business could be eligible for a grant, the following resources can be of help.
- Federal grants: Grants.gov is a searchable database of more than 1000 different grant programs.
- Corporate and non-profit grants: Select non-profits and corporations also provide small business grants.
- State and local grants: Your state economic development agency can provide you with the information related to discretionary incentive grants.
- SBIR grants for R&D enterprises: If your business is involved in R&D (research and development), you may become eligible for a SBIR (Small Business Innovation Research) grant.
- Loans or Lines of Credit
A line of credit is perhaps the most attractive financing option for small business owners because its flexibility is simply unparalleled. In fact, a typical term loan gives a lump sum of cash and you’ve to pay it back over time while a line of credit is like a reserve pool of a fixed amount. This option can be compared with personal lines of credits like credit cards. For instance, if you hold a $50,000 line of credit and take $25,000 out of that, you can still access the remaining $25,000 and if you pay back that $25,000, you can access the entire $50,000 without reapplying. In addition, a line of credit comes with lower interest rates as well as closing costs compared to a loan of comparable size. However, if you cross your borrowing limit or become late with a payment, the interest rates may substantially increase. You can obtain a line of credit from traditional lenders such as regional credit union, a national bank, or from online lenders. Usually, a line of credit becomes most useful in the following situations:
- Short-term working capital
- Reaping benefits of unique buying opportunities
- Covering unexpected costs
- Crowd Funding
Over the last few years, crowd funding has emerged as a viable funding alternative for small business owners. Crowd funding is available in two main forms – reward-based and equity-based. The former allows entrepreneurs to obtain funding by offering them some sort of reward (say, an upcoming product) in lieu of the capital offered, while the latter allows them to get funds from investors by offering them a certain portion of the start-up. Crowd funding empowers business owners to open up the financing to public instead of becoming indebted to a bank or venture capitalists. It’s important to note that you may not obtain twice or thrice the funds you have asked for but in case you’ve got a robust supportive community, this can be your ideal bet. If you’re planning to launch a crowd funding campaign, you must meticulously choose your platform and understand its ins and outs clearly as every platform isn’t created equal. You’ll also need to have a concrete marketing plan that would get the campaign off the ground. You can have a solid idea that people would want to fund, but if they’re not made aware of it properly, you may never see a dime of the money. To make your campaign successful, you should often interact with the people who invest in your project. In addition, invest in high-quality videos and a writer to make your campaign an enticing one. Remember – the more you communicate with the people and prove yourself to be clearer, the happier your community would be to help.
- Angel Investors
If you’re open to provide your investor a direct involvement in your business or the role of a mentor, then angel investors might be your best bet. These business angels invest in start-ups or expanding businesses. They not only provide development capital but can also contribute their contacts and business skills to benefit your new business. Business angels can be businesses or individuals who want to operate in the segment of risk capital. One of the key advantages of securing financing from angel investors is that they can come to an investment decision fairly quickly. It’s important to note that these investors normally don’t write blank checks. They want to see your progress as well as a way to exit with substantial profit down the line. Do your research properly before approaching angel investors. For instance, a biotech investor surely doesn’t wish to hear about your clothing manufacturing business. Finding angel investors isn’t an easy job but if you’re able to find one, it normally opens the door to lots of individual angel investors.
- Venture Capitalists
Venture capitalists are the people who invest money mostly in high-risk start-ups. These firms arrange funds from various investment companies, large corporations, pension funds and sometimes, from wealthy private individuals, and use these funds for financing high-risk start-up organizations that they consider to be profitable. Venture capital investments are usually made in cash in lieu of shares and an active participation in the invested company. Venture capital investments differ from conventional financing sources in the following manner:
- Focuses on high-growth, new companies
- Takes substantial risks in exchange for prospective higher returns
- Invests equity capital
- Comes with longer investment horizon compared to traditional financing
It can be a daunting task to capture the attention of venture capital firms as they receive a significant number of proposals from various start-ups. The ideal way to get their attention is to have a referral through some financial professional. Before planning to get venture capital investment, it’s important to keep in mind that you need to have a great product and be willing to give up or share the control of your company.
- Small Business Lenders
Today’s business market has become highly competitive together with improved economic conditions. Because of these two factors, various small business lenders are now willing to invest funds in high-growth start-ups. Most of these lenders will want to have some kind of assets to secure their loans and interest rates will usually be higher. Unfortunately, obtaining small business loans from conventional banks or financial institutions is quite difficult. You should still try to get one because of the lower interest rates. But if you’re like most of the small organizations, you may have to return with empty hands. On the contrary, various online lenders work with small business owners directly. Sometimes, they make the entire process much convenient with more transparent terms, more flexible lending criteria and quicker turnaround. With such convenience, it can be said that small business lending has surely become a more viable option compared to traditional business financing. But keep in mind that you’ll most likely receive a higher APR.
- Credit Cards
According to conventional wisdom, it’s not an ideal option to finance your business with credit cards. But after the Great Recession of 2008, most of the banks closed their doors to small organizations. This leaves small business owners with very limited options to finance their businesses. Usually, startup business owners don’t have any business credit. They only have their personal credit. As a result, using personal credit cards has become one of the most convenient options for small business owners. It’s important to note that using your personal credit card for financing your start-up business involves a substantial amount of risk. In case you finance your promising business with a credit card and it fails to succeed, you may incurred huge amounts of debt without anything to demonstrate for it. You should also keep in mind that while the additional cash flow can support the early days of your business to a great extent, misusing your credit card may lead to damaged personal credit score as well.
- Partnership Funding
When starting your new business, there’re various ways to fund your business. While sole ownership is the best way to start a new business, it may not be possible for every startup to take this route. In that case, you may want to include other person(s) into your business or want to legally associate your company with less personal liabilities. Essentially, when a business is operated by a minimum of two owners, it falls under partnership category. Many small start-up businesses need to attract financing from wealthy investors to get their business off the ground. Fundamentally, there are two types of partners that a business can have.
- Full partners: These people will invest funds into your business. Ownership of the company will be shared with the partners including both profits and liabilities. Usually, your partner will have a say in the business management.
- Silent partners: These people invest funds into your business without controlling the partnership or participating in management.
However, in both cases, you must ensure that you seek legal advice.
- Bank Loan
Businesses need a significant amount of money to cover various expenses or to cover the cost of expansions. When you take out a business loan to cover the financial needs of your business, it becomes a debt that your organization is obligated to repay in accordance with the loan’s terms and conditions. You can obtain a loan from majority of banks only when they get clear vision of profit estimates. Otherwise, it may become highly difficult to secure a bank loan. A government report revealed that 92.77% of small businesses are self-funded, 2.05% are funded by non-institutional streams and 5.8% of businesses receive funds by financial institutions. However, if your business can provide the banks with clear profit estimates, you can receive long-, mid- or short-term financing. Banks finance all asset requirements including equipment, real estate and working capital. It’s important to note that you would need to provide some kind of assurance of repayment to acquire a bank loan. Unlike other financing sources, bank loans come with some flexibility. You can pay off the loan early on, if possible, and close the agreement.
Bootstrapping is the way of starting a business with very little to zero money. It means starting your own business without any help from venture capital firms or angel investors. You become a bootstrapper when you target to become a self-sustaining business owner, starting and developing your business with zero to little capital. Successful bootstrapping needs a combination of meager thinking, planning and creativity. A bootstrapped company usually goes through the following stages:
- Seed money: It starts with personal savings or funds from family and friends to get going. Sometimes, it may begin in the form of a side business, where the owner continues with his/her regular job to accumulate enough funds required for the business.
- Customer-funded money: This stage refers to obtaining money from customers. The fund is poured back into the business. It’s the money that keeps the business operations and helps growth.
Bootstrapping provides business owners the peace of mind they require to concentrate on building relations with other professionals and customers.
When it comes to arranging funds for small business, customers can be a viable option. Customers can fund your business by prepaying their orders or by providing you with some advance. It goes without saying that you’ll use those funds for handling their transaction together with using a part to meet your business needs. This way of funding isn’t an easy one to obtain, but customers can prepay you if they actually require your products or services, which are somewhat unique and can’t be found elsewhere. However, in any case, you need to be absolutely selective when it comes to choosing customers. Such support comes along with some responsibility and could harm your reputation if your customers have a poor experience. Ideally, your customers should have prior experience in providing credit to companies in your industry. In that case, they’ll be able to understand your business model as well as the risks associated with it. Alternatively, you can search online and review various trade publications in your field to attract customers who would be willing to prepay you.
- Peer-to-peer Lenders
In your endeavor to secure loans for your small business, you’ll most likely come across organizations or individuals that specialize in P2P or peer-to-peer lending. This way of business lending provides a platform to entrepreneurs seeking funds from other individuals. This platform works as a matching service and comes with fundamental due diligence. Majority of the P2P lender provide a small amount of money. They usually cap between $25,000 and $35,000. It’s important to note that in case of a peer-to-peer loan, the lenders normally don’t lend money to the business. Instead, they lend the fund to you personally. You’ll be the responsible one who invests those funds into your business. Hence, when it comes to secure a P2P loan, your personal credit heavily matters because it’s a personal loan. It’s also important to keep in mind that P2P facilitators work with people who require money and people who lend money. Peer-to-peer lending has become a viable option for business owners who don’t qualify for bank financing.
- Family and Friends
Family and friends are the most common resources used by start-up businesses for getting off the ground. In the early stages, companies without collateral in the form of intellectual or physical assets can have rough times attracting lenders and investors. For these types of businesses, conventional forms of debt or equity financing are often out of the equation. Hence, these businesses should turn to people who’ve faith in their ability and ideas – family members and friends. It makes sense to understand that while seeking monetary help from close relationships may seem a much easier alternative compared to dealing with the bankers, the situation can easily become a delicate one if you fail to follow discipline. However, in this way of funding, there’ll be no hazards associated unlike traditional loans. In addition, such financing combine best wishes coupled with a pay-me-when-you-can nature along with less expectations of significant returns. So, it might be wise not to formalize this type of loans as that can raise the expectations.
In today’s business scenario, there are a significant number of ways available other than banks when it comes to acquiring loans for small businesses. One of these alternatives is borrowing funds from the vendors. Vendor financing is quite a common practice among businesses. Vendors are the organizations you do business with. They can be
- Suppliers like a specialty supply house or an office supply store
- Equipment manufacturers
- Service providers like cleaning service or payroll service
- An organization that supplies materials or parts to your company
Here’re the key advantages of vendor financing:
- Access to funding in much lesser amount of time compared to traditional options
- Easy repayment option with fixed payments from daily gross sales or a certain percentage of the credit card sales
- Diverse range of programs to accommodate different cash flow requirements
- Easy application process
If your business requires a loan and obtaining a traditional one isn’t possible, vendor financing could be your way out to sail through the hard times.
Majority of the successful entrepreneurs have used a combination of different funding resources during their early stages. You can even explore some or all the resources mentioned above. However, using your personal credit card should be considered as the last resort amongst these. Ideally, you should wait to start your own company until you’ve the required funds in place instead of crippling the new venture financially and probably ruining your own credit rating. Regardless of your niche, don’t forget to license your product or service prior to selling it. This makes you the intellectual owner of the same. Finally, once you’ve acquired sufficient funding, you must ensure that you use the funds for the best interest of your business and its future developments. Good luck!!
Author Bio: –
A finance Industry veteran, Charles Brown writes articles related to current financial trends, and creates unique and useful content about business ownership for his company smallbusinessloans.co With a lot of knowledge and experience in this field, he has moved on to sharing his knowledge through writing.