Entrepreneurs are an excitable bunch that are tirelessly hungry to grow the next million-dollar idea. But, no matter how brilliant the idea, many still need lots of help when it comes to learning how to fund a small business, especially in the early years of business.
The good news is that according to a survey published by the World Bank, 90% of businesses worldwide are small businesses. So you are not alone.
The bad news is that you won't be among them if you don't know how to fund a small business in today’s competitive market.
Launching a new business or expanding an existing one is difficult when bootstrapping or using personal funds. Thankfully, there are plenty of alternatives to funding, and each has unique benefits and requirements.
Many options may have already popped up in your search for how to fund your small business.
This article will aim to spotlight the top 7 most efficient ways to fund a small business, including each option’s pros and cons from a neutral point of view.
We’ll cover the following:
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Banks offer small business loans the traditional way. They provide a fixed amount of money for a specific purpose and require repayment over a set period of time with interest.
Typical small business financing options from banks include business lines of credit, equipment loans, commercial real estate loans, term loans, and business credit cards.
There's no one-size-fits-all solution. Instead, they are determined by factors including the small business industry, size and history, as well as the lender size. Qualifying for a bank loan can be difficult, and many small businesses fail to meet the basic requirements.
Small business owners must have a solid business plan, excellent credit, established revenue, and two or more years in operation. Some banks require the owner's money to be invested as proof of commitment.
The United States federal government offers Small Business Administration (SBA) loans to assist entrepreneurs in starting small businesses. The Small Business Administration works with lenders such as banks, community development organizations, credit unions, and micro-lending institutions.
While the SBA does not make direct loans, it does incentivize its partner lenders to lend money to businesses that do not meet the strict lending criteria of traditional banks by providing a federal guarantee for the business loans.
The SBA provides a variety of loans, and the two most common are:
This is a bank-originating loan partially guaranteed by the SBA, with a typical loan size ranging from 75% to 85%. It is a desirable option for some businesses because it can be in amounts of up to $5 million.
This comprises two loan parts: The bank makes loans for over half of the project cost, while the SBA guarantees up to 40% of the remaining part. Depending on how the bank handles the conventional loan, this type may offer more than 7(a) loans.
Although SBA loans help small businesses overcome traditional bank loan restrictions, small businesses must still meet criteria, such as providing a clear business plan with positive projections and a good credit score (FICO 690 and up). Furthermore, the business must be profitable and have been in operation for at least two years.
Angel investors are individuals who provide funding to companies with a business idea that they want to be a part of.
The financing offer is typically made in exchange for a stake in the company. Aside from providing the necessary funds, they also provide supervision, relevant experience, and valuable advice that supports business success.
Finding the right angel investor necessitates impressing them, whether through the business idea itself or providing a solid business plan and detailed accounting of the company's financials.
Angel investors will be part of the management team and are not expected to be "passive or silent partners," so it is critical to determine (and designate) their role, what type of decisions they will be involved in, and so on.
It is common for business owners to mistakenly associate venture capital (VC) with angel investing. But they do differ.
The primary distinction between the two is that while VCs tend to invest in growing companies with a track record of growth, angel investors are usually individuals who are more likely to invest in startups and get hands-on in the day-to-day business.
Additionally, while venture capitalists (VCs) reinvest resources from companies and individuals that offer them funding, angel investors invest their own money and labor. VC investing, like angel investing, is not just about providing capital – it can also fill the skills gaps of business owners by offering the necessary direction, connections to the industry, and a clear course for the company.
Crowdfunding has grown in popularity as an alternative to traditional loans for individuals and businesses. It involves publishing the business pitch online, including a detailed business plan, funding goals, and financial trajectory.
The next step is to usually propose to family members, friends, and strangers to back the project and provide funding.
Today, one of the leading platforms for crowdfunding is Kickstarter, which has contributed to funding 228,272 projects, including many small business enterprises. Indigogo is also a popular crowdfunding platform that has helped fund thousands of businesses.
If you have a business with unique products that can easily pique people's interest online, crowdfunding could be a great way to fund it. However, those funds will not be free, and in some cases you will need to offer "rewards," such as gifts, and in others, you will need to offer a share of the company's equity.
The most crucial step to succeeding in crowdfunding is marketing, as people must be aware of your campaign, which requires significant effort and time. Furthermore, several marketing channels like social media platforms and email campaigns also need considerable funds to reach your targeted audience.
A microloan is a short-term loan that provides funding ranging from $5,000 to $50,000.
Microloans are intended to help small businesses get started and are typically used to provide capital for various purposes, such as purchasing inventory and equipment, paying employees, and covering seasonal costs.
Nonprofit organizations typically provide these loans. However, that doesn’t mean its charity – the loan must be repaid. There are also some requirements, such as a check of the applicant's personal credit history.
Technology has modernized the traditional loan process and changed people’s perception of how to fund a small business.
Entrepreneurs are a time-strapped bunch that want to get funds and launch their projects as soon as possible, yet there are still many common reasons for a loan being denied through traditional channels.
Online loan applications have changed this. They can be completed from any location with an internet connection without the need to visit a physical branch or existing banking history.
Most applications can be processed and answered quickly, usually within 24 hours.
Numerous online loans are available today, including:
Even though online loans have recently gained popularity, finding the best one can be challenging. Therefore, when choosing an online loan platform, do your homework, check company reviews, and fully understand the application and funding processes.
Because everything is done online, customer service and support are your best friends. You will likely have many questions, so check their customer service to ensure they are available and able to assist.
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Before getting started with funding a small business, you must be prepared to increase your success chances.
Applying for loans can be a stressful process, but the following tips will make things easier for you:
Some lenders will inquire about your reasons for requesting a business loan.
Entrepreneurs require loans for various reasons to start a business, expand it, buy equipment, etc., so defining the loan type is critical since each type has its own restrictions and demands.
In turn, the lender's requirements will depend on the loan's purpose. The amount of money required can be determined by defining the loan's purpose; for example, micro-lending isn't the best option for large sums.
Lenders will need assurance they will receive their money back. Most lenders will demand monthly repayments plus interest.
Therefore, it's crucial to understand how much you can conveniently pay each month. To get a rough idea of your paying capacity, carefully examine your company's finances, particularly its cash flow.
A business plan increases your chances of obtaining funding for your small business. It assists you in steering your company's growth by providing documented goals and a roadmap to follow. It also gives lenders a detailed breakdown of how the funds will be used and proof that you can repay the loan.
The financial plan and projections are typically the most important component, so when applying for a loan, create a clear income statement, cash flow statement, and balance sheet.
After gathering all the necessary information and documents, it's time to identify the best lender for you.
Conducting thorough research and listing potential lenders with their specific requirements, fees, processing times, quotes, etc., can take time, but it is worth the effort.
Some traditional lenders, such as banks, will, for example, prioritize credit history. In contrast, some innovative emerging funding methods, such as online lending platforms, will focus on the business, its current online activity and future potential to generate revenue.
One of these emerging platforms is Duckfund, which provides small businesses with quick loans in less than 24 hours.
