Small businesses can be difficult to fund because they are often too small to qualify for traditional bank loans and too new to have a strong credit history.
However, there are several options available for small businesses to get the funding they need.
In this article, we’ll discuss 6 of the more common options as well as the factors you should consider when securing funding for your business.
How to determine what funding your small business needs?
The first step in securing funding for your small business is determining how much money you need. This can be tricky, as there are a lot of variables to consider and it can be easy to underestimate or overestimate your needs.
But in general, you’ll want to consider three main categories of expenses to simplify your thought process:
- Start-up costs: These are one-time expenses associated with getting your business up and running, such as purchasing inventory, leasing office space, or hiring initial staff.
- Operating expenses: These are the ongoing costs of running your business, such as rent, utilities, payroll, marketing, and software such as startup management tools.
- Growth expenses: These are investments you make to help your business grow, such as hiring additional staff, expanding into new markets, or developing new products.
You’ll want to think about each of these categories of expenses in terms of both the short-term and long-term, as your funding needs will likely be different in the early days of your business than they are down the road.
Once you have a good sense of how much money you need to get your business up and running (and to keep it running), you can start exploring your funding options.
What are the different types of small business funding?
There are a number of different types of small business funding available, each with its own set of pros and cons. The type of funding you pursue will likely depend on a number of factors, such as the amount of money you need, how soon you need it, and the strength of your business’s finances.
Here are 6 of the most common types of small business funding:
- Small business loans: As explained in the business finance options guide from Westpac, these are typically offered by banks and other financial institutions and can be used for a variety of purposes, including operating expenses and growth investments. Loans usually come with fixed interest rates and repayment terms, so you’ll know exactly how much you need to pay back and when.
Unfortunately, many small businesses cannot qualify for traditional loans because they lack the necessary collateral or credit history. In this case, banks might look at your personal credit score instead, which can limit the amount of money you’re able to borrow.
To navigate around this, you might want to explore online lenders — such as Lendio, OnDeck, and BlueVine — which are often more willing to take on small businesses with limited credit histories. Just be aware that online loans tend to come with higher interest rates than traditional bank loans.
You can also lookup Small Business Administration (SBA) guaranteed loans. The SBA is a government agency that provides guarantees to banks and lenders for certain small business loans, which makes it easier for businesses to get approved.
- Small business grants: These are typically offered by government agencies, foundations, or other nonprofit organizations and can be used to get your business up and running. For government-backed grants, you’ll find the largest database at Grants.gov.
Some examples of government grants for small businesses include:
- The Small Business Innovation Research (SBIR) program, provides grants for small businesses to conduct research and develop new technologies.
- The Small Business Technology Transfer (STTR) program, provides grants for small businesses to collaborate with research institutions on innovative projects.
- The Minority Business Development Agency provides grants and other support to minority-owned businesses.
You also have industry-specific and diversity grants, which are aimed at supporting businesses in a particular industry or business owners from minority populations, respectively. One example of a diversity grant is the Black Founder Startup Grant, which offers up to $10,000 in grants to Black entrepreneurs.
- Angel investors: These are typically wealthy individuals who invest their own money in small businesses in exchange for an equity stake in the company.
One of the benefits of working with angel investors is that they often provide more than just funding; they can also offer their expertise and networks to help you grow your business.
The downside is that they typically want a larger equity stake in your company than other types of investors, and they can be difficult to find if you don’t have connections in the entrepreneurial world.
- Venture capitalists: These are firms or individuals that invest money in small businesses in exchange for an equity stake in the company.
Venture capitalists typically invest larger sums of money than angel investors, but they also usually want a larger equity stake in return.
Like angel investors, venture capitalists can provide more than just funding; they can also offer their expertise and networks to help you grow your business.
However, they can also be difficult to find and may not be interested in investing in your company unless it has high growth potential.
- Friends and family: This is often the first type of funding that small businesses turn to.
Friends and family can be a good source of funding because they’re typically more willing to take on risk than traditional investors and may be more flexible in terms of repayment terms.
However, you should be aware that taking money from friends and family can put a strain on your relationships if things go wrong, so it’s important to have a clear agreement in place from the start.
- Crowdfunding: Last but not the least, crowdfunding has become a popular way for small businesses to raise money.
Crowdfunding platforms — such as Patreon and SeedInvest — allow you to solicit donations or investments from a large group of people, typically through an online campaign.
One of the benefits of crowdfunding is that it allows you to tap into a large pool of potential investors, and you don’t have to give up equity in your company.
However, it can be difficult to reach your fundraising goal, and you may have to give up some perks or rewards to investors.
So, these are some of the options available for funding your small business. You’ll need to weigh the pros and cons of each option to decide which one is right for you. Remember, no matter which option you choose, always make sure you do your research and consult with an expert before making any decisions.