Financing a small business is the most important and most difficult challenge that every entrepreneur faces. You have to consider start-up capital, the money needed for expansion, safety funds for the lean years, and so much more. Luckily, there are plenty of options to get proper funding for your small business. Keep on reading to discover the top 5 ways to get small business funding — including the pros and cons of each.
Bootstrapping, popularly known as self-funding, lets you leverage personal financial resources to support your business. Different ways of self-funding include borrowing from friends and family, tapping into your 401(k), and withdrawals from your savings accounts.
However, it also means that you take on all the risks since you retain full control over the establishment. Therefore, ensure you consider all other avenues before drawing in funds from retirement accounts and savings accounts. You don't want to damage your retirement plans or face expensive penalties or fees that could cripple your business.
- It is a more personal option
- Helps you better plan your business's future
- Ensures you avoid business debt
- Could lead to bad credit
- It may not cover all your business needs
Crowdfunding involves showcasing your business idea to a pool of potential investors. It is an increasingly popular way of getting funds for small businesses because you get to pitch your idea to multiple investors on a single platform. Therefore, many people can contribute to making your business goal a reality.
Crowdfunders are different from investors because they don't expect a financial return or receive a share of ownership. Instead, small businesses are expected to get them 'gifts' from your company as a way of showing appreciation. However, each crowdfunding platform is unique, and you need to go through the fine print to understand your legal and financial obligation.
- You get to concentrate investor decisions in one place
- Safeguards your equity since investors are rewarded with perks
- Offers you the opportunity to test the market
- Can raise a lot of money
- Helps you create a network effect
- Validates business idea
- Crowdfunding spaces may include scammers
- Provides false positives
- Takes a lot of time and effort
- Your business idea could get stolen
Money offered to your business from state, federal, local, or county government is considered a grant. Think of grants as free money because you don't need to make any repayments. It is an excellent alternative to get funding for small businesses when you have little cash available for growth or start-up.
Several grants are available for different types of small business owners — including minorities, disabled Americans, women, and veterans. Therefore, start by researching to find available grants that suit your line of business. However, ensure your business meets the strict eligibility requirements before applying for a particular grant.
- The money does not have to be repaid
- It is easy to find small business grants online
- You can qualify for multiple grants
- The application process is time-consuming
- You have to justify the purpose of funds
- Approval takes time
- Tough competition
- Eligibility requirements are strict
4. Business Line of Credit
This option is similar to a credit card and gives your business a specific limit of money that you can use. Business owners have to submit financial statements; detailing their annual revenue and cash flow to qualify. However, you get to use this money multiple times as long as you make the appropriate payments.
A business line of credit is quite similar to loans in terms of spending limits and interest rates. You get higher available amounts with significantly lower interest rates. The repayment terms are also identical to those of business loans.
- Improves business cash flows during the slow seasons
- You only get to pay what you use
- Improves business adaptability
- Builds business credit
- Includes additional fees
- Difficult to qualify
Sometimes, small businesses need significant funding to stay afloat. In such instances, a small business loan is an excellent choice. You get to receive up to hundreds of thousands of dollars with a low-interest rate. Therefore, it is amongst the less expensive ways to secure significant funding for your small business.
However, these loans usually require companies to be in business for at least a year to qualify. The application process is also somewhat long, and approval takes weeks or months. Some institutions may require a business plan and personal credit history to approve a small business loan.
- Helps in accelerating your growth
- Provides an alternative to overcome cash flow challenges
- You don't have to dilute your equity
- High-interest rates if you have a low credit score
- Repayment can damage cash flow
Get Business Funding Today
Are you looking for effective ways to fund your small business? At Fundid, we pride ourselves on helping small business owners access suitable funding options. Ensure you search for grants in our Grant Marketplace and gain access to start-up or expansion capital.