5 Ways to Get Small Business Funding
by Fundid on Jul 1, 2023 8:00:00 AM
Financing a small business is the most important and difficult challenge 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.
Self-funding, popularly known as bootstrapping, 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 withdrawing from your savings accounts. One of the primary benefits of self-funding is that you retain full ownership and control over your business, as there are no outside investors or lenders to answer to.
However, it also means you take on all the risks since you retain full control over the establishment. Therefore, it is recommended to consider all other avenues before drawing in funds from your retirement account or savings account. You don't want to damage your retirement plans or face expensive penalties or fees that could cripple your business.
- Total control to run the business your way: Self-funding offers total control over the company. You do not need to compromise or persuade other investors or lenders to invest in your ideas. This means you can invest in the right areas and make the necessary changes to achieve your business objectives.
- Autonomy in Business Expansion Opportunities: Self-funding empowers your business growth plan. When your funds are at stake, you fully control the company's expansion plans. You can expand your business model by adding new products, services, or reaching a wider market, without seeking third-party approval.
- Limited Resources: Self-funding, however, comes with the disadvantage of having limited resources. There are only so many funds you have at your disposal, which means that your business's success depends on how efficiently and effectively you use that money.
- Risk of Bankruptcy or Debt: Another significant disadvantage of self-funding is that the entrepreneur will bear all financial risks. For instance, if the company incurs unexpected losses or expenses, the entrepreneur's personal finances could be jeopardized. If your company is in debt, it will fall on you to settle that debt, which could negatively impact your credit score and future lending opportunities.
- Expensive Production Costs: Self-funding may not be suitable for financing large projects or projects with extended timelines. Long timelines mean longer lead times for recouping the cost of investment, which can be time-consuming.
Tips for Successfully Self-Funding:
If you've decided that self-funding is the right option for your business, there are a few key things to keep in mind. First and foremost, you need to have a solid understanding of your expenses and revenues and a clear plan for how you will make and save money. It can also be helpful to set clear financial goals and regularly track your progress. Additionally, consider leveraging resources such as free business counseling services or low-interest loans to help support your growth. And finally, don't be afraid to get creative. Look for ways to cut costs or generate additional revenue streams, such as offering complementary products or creating partnerships to increase brand awareness.
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 can pitch your idea to multiple investors on a single platform. Therefore, many people can contribute to making your business goal a reality.
Several platforms are available online, including HoneyComb Credit, Kickstarter, GoFundMe, etc., and each crowdfunding platform is unique. Crowdfunders typically differ from investors because they do not always require a financial return or ownership share. For instance, some platforms specialize in rewards-based or gift crowdfunding, while others may focus on equity crowdfunding. Each has its rules, fees, and requirements, so choosing the one that suits your business and goals is essential. Read through the fine print to understand your legal and financial obligation. Before deciding, consider the platform's audience, reach, and success rate.
Cost-effective: Crowdfunding allows businesses to reach out to a wider audience without incurring hefty marketing and advertising expenses.
Risk reduction: Unlike traditional financing methods, crowdfunding doesn't require business owners to give up any ownership or control of their company. This provides the opportunity to raise funds without risking your financial autonomy.
Market validation: Crowdfunding allows entrepreneurs to gauge the interest of their target audience in their business’s products/ services before launching them in the market.
Limited funds: Crowdfunding is only suitable for raising funds for small to medium-sized businesses. Larger investments usually require venture capitalists or angel investors.
Time-consuming: While it may seem simple, running a successful crowdfunding campaign requires significant planning and preparation.
Campaign costs: Crowdfunding platforms often charge a commission on funds raised. Marketing and promotional expenses can also add to the campaign costs.
Tips for a Successful Crowdfunding Campaign:
Before launching a crowdfunding campaign, you must determine how much money you need and what you'll use it for. Ensure your goal is specific, measurable, achievable, relevant, and time-bound. You should also break down the goal into smaller milestones to track your progress and keep your donors engaged. Remember that some crowdfunding platforms only release the funds when the goal is met, while others allow you to keep whatever you raise, even if it’s less than the target.
The success of your crowdfunding campaign depends on how well you communicate your idea and benefits to your potential donors. You should create a short video, text, or image-based pitch highlighting your product or service, its unique value proposition, and how it solves a problem or meets a need. You should also explain why you need the funding and what rewards or incentives you offer your donors. Keep the tone friendly, engaging, and authentic. Also, use high-quality visuals and graphics to capture attention and convey professionalism.
Once you feel confident about your pitch, promote your campaign! People can't invest if they don't know about it, so share it through various channels such as social media, email marketing, press releases, and influencer outreach. Encourage your followers, friends, family, and supporters to share your campaign with their networks, and remember to update your donors regularly on your progress and thank them for their contribution.
3. Business Line of Credit
A business line of credit is a type of loan that provides your business access to a set amount of money that can be used when needed. Unlike other loans, you don't need to take out the full amount all at once. It's more like a credit card - you can use what you need and pay it back over time. This makes it perfect for business owners who don't need a large amount of money all at once. They often have very similar requirements to traditional loans regarding spending limits and interest rates, as well as repayment terms. Business owners must submit financial statements; detailing their annual revenue and cash flow to qualify. However, you can use this money multiple times as long as you make the appropriate payments.
- Improves business cash flows: One major advantage of a business line of credit is that it can help businesses manage their cash flows. During the slow seasons, businesses can access funds to help keep the business running until sales pick up.
- Lower interest option: Another advantage is that you only need to pay back what you use. This means that if you only use $5,000 of your $30,000 limit, you only pay interest on that $5,000.
- Improves business adaptability: As a business owner, you have to be able to adapt to the changing market and the impact this may have on your cash flow. A business line of credit gives you the flexibility to use the money as you need it.
- Builds business credit: Using a business line of credit helps you to build your business credit. The more you use it and pay it back on time, the better your credit score will be. This can help you qualify for better financing options in the future.
Fundid Recommendation: We've partnered with Lendio to streamline your application process and save you valuable time. Through their simple online application, get your capital in as little as 24 hours. They have no fees, no obligations, and no impact on your credit score!
- 560+ FICO Credit Score
- $4,200+ monthly revenue
- 6+ months in business
See if Lendio is right for you. Apply Today.
- Includes additional fees: Business line of credit often has additional fees that may include annual fees, draw fees, and maintenance fees.
- Difficult Qualifications: It can be challenging to qualify for a business line of credit, especially for newer businesses with no credit history. Lenders will want to see that your business has a strong financial history and consistent cash flow.
Tips for Getting a Business Line of Credit:
While applying for a line of credit may feel overwhelming, there are ways to make the process more manageable. First, ensure your personal credit profile is strong by paying bills on time and maintaining low credit utilization. If your credit score isn't where you would like it to be, consider applying with a co-signer or providing collateral to increase your chances of approval.
Next, research potential lenders to compare their rates, terms, and other requirements before applying to increase your chances of approval. Finally, be prepared with detailed financial statements and a clear purpose for the line of credit. By following these tips, you'll be on your way to securing the funding your business needs to thrive.
4. Business Loans
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 can take up to weeks or months. Some institutions may require a business plan and personal credit history to approve a small business loan.
Types of small business loans:
- Working Capital Loans
- Term Loans
- Equipment Loans
- Startup Loans
- Accelerate your growth: Taking out a business loan can help you speed up the growth of your business. With additional capital, you can expand your operations, purchase new equipment, or hire new employees. These investments can lead to higher revenues and profits, enabling you to repay the loan and grow your business even further.
- Provides a cushion: Small businesses often face cash flow challenges, but a loan can provide the cushion you need to help you overcome these low seasons. You can use the funds to cover short-term expenses such as inventory purchases, payroll, or rent. This will enable you to keep your business running without having to dip into your personal savings or resources.
- Preserves your Equity: A business loan allows you to maintain control, retain ownership and reap all the rewards of business success. Whereas equity financing involves giving up a portion of your ownership to investors in exchange for capital.
- Credit Score Requirements: If you don't have an excellent credit score, you can receive a high-interest rate. The lender sees a low credit score as high-risk, meaning they'll charge a higher interest rate to offset the risk.
- Hefty Payments: Adding a business loan to your monthly payments could significantly affect your cash flow. It's crucial to account for these payments in your cash flow projections to ensure you can repay the loan without causing financial strain.
Tips for Getting a Business Loan:
As a small business owner, you know that a business loan can be a game-changer when it comes to growing your company and achieving your dreams. But how do you get started when it comes to applying for that loan? First, make sure you have a solid business plan that outlines your goals, expenses, and revenue projections. Next, gather all the necessary documents, such as financial statements and tax returns, to present to lenders. It's also important to research and compare different loan options to find the best fit for your business. And finally, don't be afraid to ask questions and seek guidance from professionals, such as financial advisors and small business organizations.
5. Business Grants
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. Considering applying to some grants and curious where to start?
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.
Related Reading: The Full Guide to Business Grants
No Repayment: Unlike loans, grants are not required to be paid back. This can significantly reduce the financial burden for small business owners.
Easily Accessible: There are numerous websites that provide information on grants available for small businesses. These websites can help you find the right grant to suit your needs.
You can qualify for multiple grants: Small business owners can apply to multiple grants simultaneously. This can increase your chances of receiving funds that best fit your specific business needs.
- Time-consuming: Applying for a grant requires time and effort. The application process often requires detailed information about your business and its operations.
- Justification of Use: Grants often require business owners to explain the purpose of funds. This can be challenging for some business owners to articulate.
- Slow Turn Around: The grant application process can be lengthy and requires patience. It can take months for application processing, eligibility checks, and approvals.
- Tough Competition: Small business grant applications are highly competitive. The number of applicants is often much higher than the number of grants available.
- Eligibility Requirements: Meeting grant eligibility requirements can be difficult for some small business owners. Grants often have specific criteria, such as location, industry, and business structure.
Tips for Successfully Winning a Grant:
Grants can be an excellent financing option for small businesses. Although the application process may be time-consuming, the award can be an enormous asset to your business. Before applying for a grant, small business owners need to identify the specific needs of their business. Once this is identified, ensure you have all necessary documentation and financial information ready before applying for a grant.
If you are having trouble finding a grant for you, check out our Grant Marketplace with the latest grant listings all in one place! Lastly, it's important to develop a clear business plan that has an outlined roadmap of business goals. Business owners often choose to hire a grant writer who specializes in these applications to increase their chances of winning.
Get Business Funding TodayFinding business funding is an important step in launching and sustaining a small business. Whether you choose to self-fund, apply for a loan, apply for grants, crowdfund, or set up a line of credit, your options for getting the capital you need are wide-reaching. What's more, there are many great resources like the Fundid Capital Marketplace that will help you find the right lending partner. Put in the time and effort to investigate all your options now, and you'll be ready to fuel future growth and success. So don't wait any longer – find your next lending partner through the fundid capital marketplace today!