Running a small business comes with unique challenges, and financing is one of them. Outside financing can help a small business advance to the next level. Funds, depending on the type of financing , can be used for working capital, equipment purchases, marketing, inventory, hiring and more. If you’re rebuilding your business after the 2020/2021 pandemic, funds can be a life line for your operations.
The first step is to determine how much you need and check your qualifications. Credit scores are key – pay attention to yours and have any mistakes corrected ASAP.
Here are some of the most popular sources to consider when it comes to funding along with pros and cons.
1. Venture Capital
Venture capital funds are pooled investment funds that manage the money of investors who seek private equity stakes in startups and small- to medium-sized enterprises with strong growth potential. These investments are generally characterized as very high-risk/high-return opportunities.
2. Angel Investors
Angel investors are individuals or groups of individuals who invest money or equity financing in start-up or early-stage small businesses. Angel investors often invest amounts ranging from $25,000 to $50,000. Three of the most famous companies that got their starts with angel investing are Amazon.com, Starbucks, and Apple.
- Even if rejected, you may make excellent contacts for getting funding in the future.
- Going through the process of giving presentations about your business to potential angels is great practice for the future.
- Angels with small business experience can offer valuable business advice.
- It is a reasonably complicated and time-consuming process to secure angel funding.
- An in-depth business plan is required.
- Angel investors conduct due diligence and perform competitive analysis, eventually dismissing up to 90% of applications.
- Some angels want to be involved in the companies in which they invest.
3. Personal Loans From Family and Friends
One of the most accessible options is borrowing funds from family and friends. If you approach the process in a professional manner, you’ll see the benefits of “lenders” who are already familiar with you and your business story. Because of your close relationships, you won’t have to demonstrate your trustworthiness and your ability to see your promises through.
Provide an organized business plan describing how you’ll use the funds to help your company grow. Make sure to follow through with documentation rather than relying on informal agreements. Keep in mind that entering into this kind of financial partnership can put personal relationships at risk and may also adversely affect your ability to access other kinds of loans.
Find personal loans and other reliable types of financing here: 5 Safe Funding Options for Your Small Business.
A resource that’s becoming increasingly popular for initial financing is crowdfunding, through sites like Kickstarter and Indiegogo. This strategy relies on many smaller investments, whether it’s a few dollars or a few hundred dollars. It’s up to individuals to decide how much to contribute based on your pitch.
If all goes well, not only will you receive the funds you need, but you’ll also build a loyal customer base. You’ll need to prepare in advance of the launch, building up a strong community and spreading the word far and wide. Set your goal amounts as low as possible so you can exceed them. The contributions you collect can serve as an example of social proof, influencing potential donors to support your cause as well.
While there are some attractive benefits of crowdfunding for your business, be wary of the disadvantages. Find out why it can be a risky choice here: Reasons to Avoid Small Business Crowdfunding.
5. Small Business Grants
Grants are non-repayable funds given by one party, often a government department, corporation, foundation or trust, to a recipient, often a nonprofit entity, educational institution, business, or an individual.
Use our guide to help you find a grant that can help you build your business: Small Business Financial Help: 4 Insider Tips About Small Business Grants.
6. Merchant Cash Advances (MCA)
An MCA is not a loan in the traditional sense. If you take out an MCA, a financing company advances cash to you in a lump sum. They then take a percentage of your daily credit card and debit card sales, on top of charging a fee.
MCAs typically range from $5,000 to $500,000, and have factor rates between 1.1x and 1.5x. Repayment is based on a holdback percentage that varies by lender, and can range from 8% to 30%.The average repayment time frame for a merchant cash advance is 8 or 9 months but the term can be as short as 4 months and as long as 18, depending on your business. Here are costs and factors to consider:
- Factor Rate: This is the total cost of the money you’re advanced. You’ll need to pay back the original sum you receive plus costs.
- Holdback Percentage: If you have a high holdback percentage, the MCA provider takes more out of your daily credit card totals.
- Additional Fees: You might be responsible for setup fees or advance fees that can equal 5% or more.
7. Invoice Financing
Invoice financing is not a loan in the traditional sense. Instead, you sell your customer invoices to a factoring company in exchange for a specified sum. They take care of collecting the payments, which means you can receive funds more quickly.
8. Business Credit Cards
Getting a credit card can be a flexible option when it comes to financing your small business if used correctly. Because they are a revolving line of credit, you can continue borrowing without depleting your available funds. In addition, they offer discounts and rewards for spending. With your credit card, you can also take out a cash advance, a type of short-term loan that allows you to withdraw cash which you then repay with interest. Learn how you can benefit from a business credit card.
At the same time, be sure to review terms and conditions carefully. Understand and prepare for payments and adverse consequences if you are unable to meet your obligations. If you’re the sole proprietor of your business, your personal credit score will be impacted by late payments.
9. Equipment Financing
An equipment loan is just that – a loan. You’ll receive a lump sum in your business account that requires repayment on a regular basis, typically monthly. The cost of borrowing funds will depend on the amount, APR, and term length.
Many times, the piece of equipment will act as the collateral and secure the loan but be sure to check with your lender about specific application requirements.
Unlike an equipment lease, you’ll have the opportunity to purchase the equipment. Once you repay the loan, the equipment is yours to keep. For equipment that will last your business an extended period of time, an equipment loan could be a great option to consider.
Keep in mind that other financing options also allow you to use funds for equipment purchases, upgrades, or repairs. Check with your lender on the use of funds before you sign on the dotted line.
10. Term Loans
Term loans a common source of funds that entrepreneurs use to develop their small businesses. The idea’s simple enough: you borrow capital and then repay with interest on a regular basis. But it can start getting more complex once all the factors are considered.
These loans are typically differentiated most commonly into three categories, specified by their terms.
The first is short-term loans with terms that range from a few weeks to no longer than a few years. These fast funds can be useful in times of emergency because most businesses are eligible to receive their deposit very quickly. However, don’t look past the fact that these accessible funds come at a steep price. Their high interest rates and frequent payments can actually cause more harm than good to your business cash flow.
Medium-term loans typically have a life of several years and are mostly offered by traditional bank lenders. You’ll probably find that they’re more affordable since they have lower rates and monthly payments, but also come with more eligibility requirements and slower time to funding.
Finally, long-term loans provide you with the most sustainable option. Because they last the longest, the amount owed can be spread out into smaller monthly payments with lower interest rates, reducing negative impact on monthly cash flow.
11. SBA Loans
An SBA loan is a type of long-term loan secured, in part, by the US Small Business Administration. The agency makes a guarantee to the bank that it will cover a percentage of your desired loan amount if you can’t make your payments. This is a win-win for small business owners and lenders: you benefit from low rates and long terms, while lenders have the advantage of additional support from the government.
Until recently, the main concern that borrowers faced when it came to applying for an SBA loan was that the process was lengthy and complicated. That’s why SmartBiz helps match you with the banks in our network most likely to approve your application. You’ll get the funds you deserve through a quick, affordable, and transparent process. If you have your paperwork ready to go, you can progress through the application process and get approved for funding swiftly. Learn more about SBA loans here.
As mentioned above, your credit score and financials are key to getting the lowest cost funding when you need it. Low rates and long terms should be your goal for a loan product.
Another consideration is to have a solid budget and business plan. This can help you determine the amount of money that will best help you reach your goals. Here are posts from the SmartBiz Small Business Blog to review before you apply with a lender or other type of investor:
- Do I Need a Business Plan to Get a Small Business Loan?
- Budget Forecasting: How Can This Strategy Boost Your Business?
No matter what type of funding you acquire, be sure to have a plan, make timely payments, and ask questions if you need.