16 Small Business Funding Sources
Finding funding sources for a small business is often challenging, especially for first-time business owners. Gaining access to capital for your business requires a lot of time and effort, but when you go down the right path, you can get the funding you need to succeed. You’re not limited to a small business loan from a bank; think outside the box, as there are a number of ways to get working capital. More than likely there is a small business funding option listed below that can help you.
If your business is a start-up, you may have access to a few different funding options. The first is an angel investor, who is a person interested in investing in a company as an entrepreneur. Angel investors can provide a one-time investment to help get the business off the ground or offer continuous support as the needs of the business grow and change. The difference between an angel investor and another type of investor is the focus on the success of the business, rather than reaping a big profit.
If you’re interested in this option, try using online resources like AngelList or Gust to find potential investors. These websites focus on connecting small business owners with angel investors. Gust functions like a social network, allowing you to build relationships and interact with investors. AngelList is more complicated, but you can set up a profile with an activity feed, which investors can view. All start-ups and potential investors registered on these sites have gone through a vetting process to make sure they’re legitimate.
The most common investment option for small businesses is venture capital. Venture capitalists will typically invest in companies with the potential for long-term growth. On the investor’s side, the risk is high, because the growth is generally based on perception and projections. Investors continue to offer venture capital because of the potential for higher-than-average returns. For start-up companies with limited history, obtaining traditional funding is more challenging, so venture capital is a funding option that is within easier reach.
Business plan competitions
Another appealing option for start-up company owners is entering business plan competitions. Some of these competitions take place online, allowing for entry to many at the same time, while others are handled in person. Look for business plan competitions in your area to find out how to enter and what is needed to compete. For brand new business owners, this option is especially appealing, because it doesn’t require any type of collateral or credit information.
Make sure to go into the competition with a solid business plan that can stand up to the questions and issues that will come up. These competitions are usually judged by experts in the small business funding market, so they’ll come with tough questions and expect you to have the answers. Don’t shy away from any topic, and bring documentation to back up your explanations. Describe the problem your business will solve in great detail while showing your passion for the subject and industry.
A start-up may also qualify for a business incubation program. These programs exist to support entrepreneurial development through all types of business services and resources. One of the leading organizations focused on business incubation is the International Business Innovation Association (INBIA), so browse their site to learn more about this option and whether your business would qualify. If you do qualify, you’ll have access to helpful resources and services designed to give you a competitive edge and to grow your business.
SBA 7(a) loan
Start or expand your business with an SBA loan. As a small business owner, your best bet is SBA 7(a) loan.
To qualify, you’ll need to demonstrate a clear need and planned use for funds, along with the purpose of your business. The program also has certain business size standards that are based on your industry. The owner of the business must have equity available to invest. Nonprofit organizations would not qualify for this type of loan.
With an SBA 7(a) loan, you can qualify for up to $5 million to pay for start-up costs, buy land or construct a new facility, fund equipment, repair current capital, purchase materials or refinance business debt. Small business owners tend to choose this option over a traditional loan because of benefits like potentially lower down payments, extended terms and more flexibility. The program offers additional resources and options for businesses looking to meet short-term goals, businesses located in underserved communities and military personnel.
Although the SBA doesn’t actually administer any loans to small business owners, the organization does accept some risk. Any bank that offers an SBA 7(a) loan has access to the organization’s guarantee that it will repay part of the loan if the business owner defaults. Before you submit an application, make sure to use the SBA’s checklist to prepare all the documentation you’ll need.
Small Business Lending Fund
According to the U.S. Department of the Treasury’s website, the Small Business Lending Fund (SBLF) is a dedicated fund designed to provide capital to qualified community banks and community development loan funds (CDLFs) in order to encourage small business lending. The purpose of the SBLF is to encourage Main Street banks and small businesses to work together, help create jobs, and promote economic growth in communities across the nation.
Small business financing
There are a number of small business financing options to consider, including equity financing, microfinancing and debt financing (also known as peer-to-peer lending). We’ll explore each of these in detail below. When looking for business financing, these can be very good options.
The process of equity financing involves selling stock options to investors, both individuals and institutions. In exchange for their investments, the stock shareholders receive an ownership interest in the business. A newer version of this method is equity crowdfunding, which became an option for members of the public in May 2016 and allows anyone with an interest in the business to invest and own shares.
One alternative method to debt financing is peer-to-peer (P2P) lending, which allows you to lend and borrow money to and from other business owners and peers within your industry or business space. Instead of using a bank or other financial institution, P2P lending eliminates the middleman.
However, the risk is generally higher, since there is no guarantee that the funds will come through on time or even at all. When you go through an accredited financial institution, protection exists on loans. Securing P2P financing also typically takes more time and effort to find the right partner. Popular P2P lending sites include Prosper, LendingClub and Funding Circle.
For owners of struggling businesses, microfinancing is another good small business funding option, giving additional financial resources to those who qualify as low-income borrowers. Micro-financing options are handled by community development financial institutions (CDFIs). In order to pursue this small business financing option, you will need to show proof of financial disadvantages and how they impact your ability to run and grow the business.
Traditional small business loan
It’s not always easy to qualify for a traditional loan, but you may have an advantage if you apply through a financial institution that specializes in small business loans. You can also apply for a bank loan with your financial institution who might be more familiar with your situation.
The better your credit score, the more likely you are to qualify. But loan officers often review the debt-to-income ratio, which can make it more challenging to qualify for all the funding you need for your business.
A term loan is a very common traditional loan that lasts between one and ten years but may last as long as 30 years. A term loan usually involves an unfixed interest rate.
When you’re planning to buy real estate or construct a commercial building, you can apply for a mortgage loan on the property. Mortgages are used by businesses and individuals to purchase real estate without needing the full value upfront in cash. Standard term lengths for mortgages are 15 and 30 years, and the interest rate on this type of loan will vary based on credit history and other factors.
Using credit cards for a financing solution
Credit cards — both personal and business — can also be used to fund purchases for the company. Most credit cards have high-interest rates, so this option should be used only for short-term funding. Certain types of credit cards offer rewards, such as cash back, which can boost the cash flow of the business.
Many small business owners use the funds in their personal savings accounts to pay for business expenses and get the company off the ground. The concept of stretching financial resources as far as possible is called bootstrapping, and it’s an effective and affordable way to maintain a positive cash flow.
Applying for a small business grant is a way to obtain business funding without having to pay it back. The Business USA website is a good place to start looking for business grants. There, you’ll answer five multiple-choice questions about your business venture. Then, you’ll get a list of potential government grants, including state and federal grants, that may apply to your company. Most grants have specific qualifications and purposes. For example, many of the grants found on Business USA focus on companies that cater to farming assistance, disaster relief and minorities.
Other options for grants are available through the National Association for the Self-Employed, where only members of the association can apply, and the Small Business Innovation Research Program. Female business owners can apply through the Amber Grant for Women, which gives a $500 grant to one woman per month. Each of those 12 women is also eligible to receive an additional $2,000 business grant at the end of the year. It’s worth the time to research grant programs, because you’re likely to find some good financing options.
Business owners also have alternative options to secure funding, aside from the traditional lending and investing opportunities. One such option is crowdfunding, in which a business owner can request donations from anyone who visits the website. Kickstarter is one example of a popular crowdfunding platform, although business owners using this site will typically offer something in return for payments. For example, if your business will sell a specific product, those who invest early could receive some of the first products manufactured.
Other crowdfunding websites include Crowdfunder, which is geared toward entrepreneurs and new start-ups; Onevest, which vets the business owner before allowing a campaign to start; and Indiegogo, which will take a smaller percentage of the earnings if the goal isn’t reached. One of the risks of crowdfunding is that the platform will take a percentage of all funds raised. Additionally, some estimates show that less than 33 percent of campaigns reach their goals.
Merchant cash advance
If your business accepts credit cards, it will rely on a merchant to process the cards and deposit the funds in your company bank account. You could turn to that merchant for a cash advance, which involves selling part of the business’s future credit card sales to the merchant or provider. In exchange, the business receives a lump sum that can be used as capital to boost the business and purchase necessary items. In order to repay that advance, a percentage of all credit card transactions will be paid directly to the merchant as part of the settlement process.
If your business operates in the eco-friendly industry, you may qualify for funding through a green bank. These institutions are part of a global initiative to reward businesses that help people become more environmentally conscious. Both new and existing businesses can qualify if they invest in eco-friendly goals, such as adding geothermal heating options or adding solar panels to facilities.
Lines of credit
A line of credit is when a financial institution (traditional or online lenders) establishes a maximum loan balance that a borrower can maintain. You can withdraw funds from the line of credit whenever you need to, as long as you don’t exceed the maximum amount set. In some cases, once you pay back on what you’ve borrowed, your line goes back up to the maximum amount of credit (similarly to a credit card). In most cases, small business owners use lines of credit for short-term funding and basic day-to-day operations (payroll, purchasing supplies, seasonal demands, etc.).
With the right small business funding sources, you can focus on other aspects of growing the business and achieving success. Understanding the different sources available to start-ups and small business owners makes it easier to figure out which option will work best for funding your next venture.
How can you get your small business funded?
In this article, we’ve described many small business financing options, including angel investors, business plan competitions, business incubation, SBA loans, equity financing, peer-to-peer lending, microfinancing, traditional loans and more. From working capital loans to lines of credit, or industry specific loans, Kabbage can help you get a small business loan for your needs.
How much funding does your business need?
We recommend looking at your anticipated expenses and weight out the pros and cons of obtaining additional funding. The SBA offers a helpful guide to calculating your startup business costs.
How does a business line of credit work?
Lines of credit are arrangements between lenders and borrowers that give a maximum loan balance for the borrower to pull funds from. With a line of credit, you can borrow funds at any time as long as you don’t exceed the maximum amount. The largest advantage to lines of credit is their flexibility. You don’t have to use the total amount you’re approved for, which means you don’t have to pay that total amount back.