A Practical Guide to Funding Your Small Business with Business Loans and Beyond
Whether you’re just starting your business or growing an existing one, there are a multitude of options for small business funding to help meet the needs of your unique situation. To help you understand how to fund a small business, this guide will detail startup necessities, outline funding options, and walk through what to consider when selecting a funding option.
You should go into seeking funding for a new business armed with some information. First, decide what’s on your “need” list and what’s on your “it can wait” list. Pose the question this way: What is the bare minimum required you need to get your venture off the ground?
At the same time, you can’t skimp on the necessities. This will, of course, be a major investment. So, if — when thinking through your new business venture — you put something on the “it can wait” list, check with other areas that may be affected if that area doesn’t get funded.
Here are some common business expenses and the questions surrounding them to consider before trying to secure funding:
- Payroll — How many employees do you have, what are you paying them, and how many employees will you have in the next six months? Startup and small businesses don’t always stay small, so think about how many people you will need to start, but also how many you may need before you start making a profit. Also, consider how you’re going to pay yourself. As the founder of the small business, you need to live, too.
- Insurance — Is your business prepared if disaster strikes? Will you be offering health insurance to your employees?
- Licensing, permits, and taxes — Doing business costs money and you want to make sure you won’t be running into any legal trouble. How much capital do you need to cover licenses, permits, and taxes?
- Rent and utilities — If you’re moving your business into a physical space, make sure you can afford your lease and utility costs to keep things running. Make sure you clearly understand the terms of a commercial lease before signing a contract.
- Equipment — Do you need computers, phones, machinery, or other forms of equipment? Is renting or leasing equipment a possibility? Can you get equipment used? How much personal protective equipment (PPE) do you need to buy to protect worker and/or customer health?
- Inventory and upcoming orders — Do you have enough raw product to make your business continue to operate? If you don’t, should you be investing in more?
- Advertising and website — You have to let people know you exist, and this doesn’t happen without advertising and a good website. Perhaps you will buy social media ads, rent billboards, put an ad in a local magazine, or optimize your site for the best search engine results. All of this costs money.
- All the extras — Will you or your employees need to travel? Are there consultants in your field you should pay for some advice? Will you need a lawyer on retainer or to handle any sort of small business matter such as obtaining a copyright or trademark?
[Read more: How to Sell Products and Services on Social Media]
Types of small business funding
There is no “right” way to fund your business, whether you’re looking for startup funding or to maintain or grow your existing business. Some types of funding work better for different stages of your business, and sometimes the right answer might be a combination of funding types.
Here are some common ways to fund your business:
If you are a new business, you might not have a credit history. In that case, traditional lenders will look at your personal credit when deciding whether to give you a loan. Your credit history is the track record of how promptly you pay your bills and is used to determine how risky it is to lend to you. Traditional lenders, like banks, are cautious with their money. If your credit score is below 680, there may not be many options for you in the traditional lending arena. On the other hand, if your business is more established (two or more years in operation) and you have good credit and at least $100,000 a year in revenue, you’ll probably find very good interest rates from a traditional lender.
If your credit score isn’t up to par or you don’t have much time in business, you might look at popular online lenders for a loan. According to a recent Small Business Credit Survey by the Federal Reserve, 22% of the businesses surveyed applied for funds through online lenders.
If you have a new business but your personal credit score is high, you might consider taking out a personal loan for funding. Be aware, though, that if your business fails, this will seriously impact your personal credit.
As the name suggests, a microloan is a very small loan, typically of less than $50,000 given out by individuals rather than traditional lending institutions. These loans may also be offered through government organizations such as the Small Business Administration (SBA) or nonprofits. If you don’t need to borrow a lot of money, this could be a good direction.
You might be surprised by what you can do on a limited budget. Bootstrapping your own business can pay off down the road if you want to apply for a loan because it shows perseverance and dedication. The big question is whether you can afford to invest your own money and if it’s enough to accomplish your goals.
Are you involved in your local entrepreneurial community? It can be a good place to find people willing to invest in your business and ideas. Diligently research any investors and venture capitalists and work to come to an agreement on a term sheet about your business arrangement.
Crowdfunding will require you to pitch your business idea online through popular sites such as Kickstarter or Indiegogo to get upfront pledges to fund the business or product. However, you have to know how to market yourself and be savvy with web content for these options to work.
Friends and family
This can be a risky way to fund a business, but if you treat the situation professionally, it might work out. Friends or family helping to fund your business should earn interest or equity in the company and should be given monthly payments. Paperwork should still be drawn up.
When a business sells its outstanding invoices to a factoring company, it is called invoice factoring. An invoice factoring company quickly repays the business a percentage of what the invoice is worth, usually between 75% and 90%. Once the full invoice is paid, the factoring company pays your business the remainder of the invoice while subtracting its factoring charge and a factoring fee. This isn’t a loan, but it can help companies cover cash flow issues. Because it isn’t a loan, whether a factoring company will work with your small business or not is not as dependent on your credit score, but rather on the credit scores of your clients who the company will be depending on to pay in a timely fashion.
Small business grants to consider
Many government entities, corporations, and nonprofits offer money for people to launch or grow small businesses. Some small business grants are open to any small business while others are targeted to specific demographics, like businesses owned by minorities, women, or veterans. The website Grants.gov also serves as the largest database for federal grant opportunities.
Government grants are available for small businesses at the federal, state, and local levels for a variety of different business types and circumstances. A few examples of government grants include:
- U.S. Department of Commerce Minority Business Development Agency (MBDA): MDBA loans and targeted grants are designed to help minority-owned businesses grow.
- Farmers Market Promotion Program: Businesses in the agricultural sector can benefit from the Farmers Market Promotion Program, which aims to increase applicable marketplaces and manufacturer-to-consumer products. These businesses can receive educational resources, training, and financial support.
- Small Business Innovation Research Program (SBIR): The SBIR Program provides grants to small businesses with the ability to perform federal research for the potential to curate profit-oriented goods and services.
There is no “right” way to fund your business, whether you’re looking for startup funding or to maintain or grow your existing business.
General small business grants
Nonprofit and larger corporations offer grant opportunities and other funding options to small businesses based on their eligibility and industry. Here are a few general small business grants to consider:
- Business Warrior: Business Warrior’s mission is to provide small businesses with direct access to capital at low-interest rates and with short approval times.
- GoFundMe Small Business Relief Fund: GoFundMe assists qualifying small businesses that were negatively impacted by the COVID-19 pandemic by matching $500 grants to those that raise the same amount in a GoFundMe campaign.
- Dream Big Awards: The U.S. Chamber of Commerce’s annual Dream Big Awards seek to recognize small businesses across the country that have helped to grow the overall economy. Small businesses can submit their application for the chance to win a $25,000 grand prize during the Chamber’s Big Week for Small Business.
Businesses with a specific niche or operating in a specialized industry can benefit from industry-specific grants. These grants aren’t open to all small businesses and you must carefully consider the requirements and eligibility guidelines before applying. A couple of examples of industry-specific grants include:
- Etsy Emergency Relief Fund: Etsy sellers may be eligible for relief funding thanks to CERF+, a nonprofit organization that provides support and preparation resources to artists during emergencies and disasters. This program grants up to $2,500 to Etsy sellers who have been through a natural disaster.
- Jobber Grants Program: This program is meant for businesses in the home service field, such as landscaping or pool servicing. The Jobber Grants Program provides grants between $2,500 and $15,000.
Diversity business grants
Diversity business grants are programs that seek to elevate minorities and other underrepresented communities by providing financial resources, mentorships, and networking opportunities. Here are some examples of diversity business grants:
- Amazon’s Black Business Accelerator Program: The Black Business Accelerator Program is designed to benefit Black sellers on Amazon. It offers advice, resources, mentorship opportunities, and financial and promotional support. Eligible sellers receive access to cash grant opportunities, advertising credits, money towards startup costs, and more.
- Amber Grant Foundation: Founded in 1998, the Amber Grant Foundation seeks to support women entrepreneurs by awarding a $10,000 grant each month and a $25,000 grant each December. Grant winners are chosen based on the applicant’s story and vision for their business.
- Black Founder Startup Grant: Backed by the SoGal Foundation, this program awards up to $10,000 in grants to Black and multiracial women and nonbinary entrepreneurs. The Black Founder Startup Grant program accepts applications year-round.
Ways to make your business attractive to investors and lenders
Write a business plan
Writing a robust business plan is a good way to present your small business to banks and potential investors. It should include your personal story and be able to convey your passion for your small business.
The business plan will require you to do a fair amount of market research and convey that you understand the industry you are entering and the direction in which you want to take your business. Back up your financial projections with data. A business plan should also include a clear business model as well as a marketing plan.
[Read more: How to Write a Business Plan]
Build your credit score
Before you apply for funding from a traditional lender or even some online lenders, it is crucial you know your business credit score as well as your personal credit score. If they aren’t up to snuff, take steps to raise them such as by paying down debt or removing any incorrect derogatory items. You can even take it one step further by opening a business credit card. When you use the card each month and pay off the balance by the due date, you’re building your business credit, which increases your credit score. This is especially helpful if you’re a new business owner looking to build a credit score quickly.
Crunch the numbers
At the end of the day, investors take a chance on businesses they hope can make them a return on their investment. Creditors, on the other hand, may want to see how your business is profiting financially before they provide you with a loan. To instill confidence in investors and creditors, it’s important to crunch the numbers in your business.
Crunching the numbers means displaying your business’s financial track record including where the business currently stands in terms of cash flow and the level of debt you’ve accumulated. If your business is new, lay out a clear plan of how you’re going to complete your financial goals and when investors can expect to see a return on investment in your business.
Craft a narrative
Investors are used to hearing pitches from hopeful business owners filled with hard data, metrics, and business analytics. While these details are critical to any successful pitch, they’re not the only factors that can sway an investor in favor of your business. Investors are humans, too, and are interested in the story behind the business you are pitching.
Come up with a strong narrative that will explain how you came up with your business idea, what drives you in your business, the impact you intend your business to have on the world, and more. The more compelling the narrative, the greater the chance investors will feel compelled to take a chance on your business.
Create a clear investment structure
Before investing in your business, investors want to know you have a clear layout of the investment structure. For example, legal ramifications, including possible liability exposure, can play a factor in their decision on whether or not to invest. Would the investor be a shareholder or partner? If so, would they be able to make business decisions alongside the business owner?
It’s also important to create a stockholder’s agreement that lays out each owner’s rights and obligations, including if the owner wants to sell, if the business shuts down, and other issues. Once you have a clear investment structure, it’s time to negotiate all the details with your investors.
[Read more: Best Tips From Famous Investors]
Selecting a route to fund your business
Answering questions about your business and how you plan to use the financing is a good way to know which direction to take to fund your business. You should be able to answer the following:
- How much money do you need, and what do you need it for?
- How much debt can you afford to take on?
- What is your preferred method of borrowing money?
- Are there any changes you need to make to be eligible for that type of funding?
- Do you have a good personal credit score?
- How long have you been in business?
- What are your revenues?
- Do you have any collateral?
- Do your story and business idea seem like something you could take to an investor?
- Have you established a solid enough business plan to talk to an investor or a traditional bank?