Tips on How to Get Financing to Start a Small Business

For anyone who has just started a business–obtaining the funds to grow the business and keep it going can be intimidating and ultimately the difference between success and failure. Even the process of finding how and where to get working capital can be complicated and frustrating. If you look this up, you are going to be met with multiple different methods. Each of these comes with pros and cons and is specific to the age of your business and the financial background of the person responsible for handling the money. 

We have compiled a list of some of the methods that entrepreneurs can access small-business financing. Some might not be accessible to people launching startups or to owners with no prior experience. 

1. Friends and family

Family and friends can be a potential source to get financial capital for your business. However, if your business goes through hard times or fails, it can be a major strain on your relationship. Many family members of friends stop talking to one another when the business fails. 

2. Grants

Small business grants are available from sources such as nonprofit and for-profit companies and government agencies. Grants from government agencies tend to have narrow eligibility requirements and often give grants to businesses in technology, science, and energy that can help bring growth to a community. Grants from nonprofits tend to focus on a specific type of business owner whether it be women, veterans, or minorities. These often have the widest eligibility requirements and can be given out on merit or through completing an application. 

3. Venture Capital

Venture capital firms provide funding to startups and small businesses early in their development. Compared to angel investors, venture capital firms work very fast, but at a price. The firms are very specific about what areas and who the invest in

4. Loans from the SBA

The SBA otherwise known as the Small Business Administration has a program that helps people get financing for their business after they show they are successful for a few years. These loans are given out with a guarantee that the loan will be repaid to the lender. If the business doesn’t pay back the loan, the government will still pay back the lender. Lenders are often traditional banks and the guaranteed repayment from the government motivates banks to lend to more small businesses. However, these loans are often difficult to come about. 

5. Angel Investors

Angel Investors refer to wealthy people or groups of people who want to fund startups. You can search for angel investors by industry and location through sites such as Angel Capital Association’s national directory of angel investors and firms. After you find a potential investor, there is a long interview process with the person’s entire business team as well as the entrepreneur in order to ensure that the business is viable. Yes, having a benefactor alleviate funding burdens is nice, but it can be a very slow and difficult process before you get any money. 

6. Crowdfunding

Crowdfunding sites have become a popular way to gain capital for a business, especially after the rise of sites such as Indiegogo and Kickstarter. Small business owners or entrepreneurs have to create a 30-day fundraising campaign that looks for investors in one’s company/project instead of going to a bank for a loan. Business owners will reward individual investors with gifts for giving money such as a discount on their product or equity in the company. 

7. Partner Financing

Deciding to take on a business partner can be a good way to get funding in exchange for equity in the company. The partner could be an employee, someone not involved with day-to-day operations, or just an investor. If you are looking to take on a partner, make sure to write down every detail of the business partnership with the help of a lawyer. You don’t want your partner to turn on you and take advantage in the future. Make sure to define expectations and boundaries of what is expected of each while running the business and scenarios of how the business would fare if someone died or wanted to be bought out. 

8. Community Development Finance Institutions

Many nonprofit Community Development Finance Institutions (CDFIs) are located across the country and provide capital to small business owners within certain terms. 

9. Bootstrapping

With this method, small business owners start their business using as little external capital, such as loans, as possible. Funding either comes from using revenue from the business once it gets going or from personal finances like selling assets using one’s savings or credit cards. Entrepreneurs will find the least expensive way to manufacture a product or service. 

10. Pre-sales from Your Product

Holding a pre-sale in which customers pay for your product up-front is an easy way to make money if you are running a small business. Small business owners can use this money to fund the manufacturing of the initial products. You also know if customers want to buy your product or not. 

11. Online Alternative Lenders

Online alternative lenders have become a popular business financing option compared to getting capital through traditional bank loans. Kabbage, OnDeck, and BlueVine are a couple of online alternative lending companies and are an efficient way to get funding. You don’t have to go to a bank and apply for a loan because everything is done online and funds can be deposited to you in a couple of business days. These lenders also offer business lines of credit, so instead of giving you one sum of money up-front, you can use as much or as little as you need, but within your limit.

There are some downsides to this method, however, as using these lenders can be a very expensive way to borrow money. The interest rate on a bank loan could be about 7%-8% while online lenders can charge up to 60%-70% in interest. There is a trade-off between how desperately you need the capital and how much you are willing to pay for it. 

12. Banks

The most obvious place to get a business loan might not be the best route to go. Traditional banks will only work with you if they consider you “worthy” or “on the track to success.” They want to make sure they get their money back which means they look for businesses that have a track record of success and have been in business for a number of years. 

13. Invoice Financing/Factoring

Invoice financing, or factoring, grants you money from a service provider on your outstanding account receivable. You then repay this once the customer settles the bill. Your business thus has the cash flow to keep going while you wait for clients to pay outstanding invoices. This allows companies to close the pay gap between billed work and payments to contractors and suppliers. Owners can then accept new projects more quickly, grow their businesses, and hire new workers. 

14. Marketplace Lending

Peer-to-peer (P2P) lending raises capital through various websites that introduce borrowers to lenders. Two of the most popular P2P lending platforms in the United States are Lending Club and Prosper. A borrower creates an account on one of these sites which keeps records, transfer funds, and connects borrowers and lenders. This can be a financing alternative for small businesses, especially after the post-recession credit market. One downside is that this kind of lending is only available to investors in specific states. It is a hybrid of crowdfunding and marketplace lending. 

15. Merchant cash advances

A merchant cash advance is a quick way to obtain capital, but is the opposite of a small business loan in terms of structure and affordability. Cash advances should be a last resort because they have such high expenses. In the process, a financial provider gives a lump-sum amount of financing and buys the rights to a portion of your debit and credit card sales. Each time a business owner swipes a credit or debit card when ringing up a sale, the provider takes a cut of the sale until the advance gets paid back. 

16. Convertible Debt

Convertible debt lets a business borrow money from an investor or investor group because they agree upon converting the debt into equity in the future. You have to be ready to give some control of the business away to an investor because these investors are guaranteed a set rate of return per year until a set date of action occurs that lets you convert. This method helps you and doesn’t place a strain on cash flow while interest rates build during the term of the bond. 



Keep reading