Regardless of your business idea, the most crucial element of small business success is your ability to secure funding to grow your business. Most small business owners finance their startups by borrowing funds from friends or family, while others finance them with capital. There are, however, multiple options available, and founders must beware that raising small business funding may be a daunting task and may take longer than expected. Below is a list of ways to seek funding for starting a small business.
Secure Venture Capital From Investors
Investors can provide you with funding for starting a small business via venture capital investments. The financing is usually offered in exchange for an active role and ownership share in the company. Venture capital focuses on companies with the potential for high growth, takes higher risk for prospective high returns, invests funds in exchange for equity, and has a long-term investment horizon compared to traditional financing. Most venture capitalists become members of your board of directors, and business owners must give a portion of ownership and control of the company to secure the funding.
Small business owners who want to secure funding for starting a small business are advised to follow the listed steps.
- Find an investor: Look for venture capital firms and perform sufficient background research to secure an experienced and reputable investor with the required knowledge of working with small businesses.
- Share the business plan: The investor reviews it to ensure it matches the investing criteria. Most funds concentrate on a geographic area, industry, or stage of company development.
- Go through the due diligence review: The investor will assess the company products and services, management team, financial statements, and corporate governance documents.
- Work out the terms: If the investor is interested in your startup, some terms and conditions must be agreed upon before investing.
- Investment: You can secure the investment once you and the investor agree on the term sheet. The investor will assume an active role in the company and injects finances as the small business grows to allow the startup to execute its plan.
Bootstrapping Your Small Business
Self-funding is an efficient way of seeking funding for starting a small business. Bootstrapping allows you to leverage financial resources to support your startup, and you can obtain them from friends, family, or your savings accounts. Self-funding will enable you to take on the risks and retain total control over your startup. You are advised to be careful with your spending by investing in the amount you can only afford, especially if you plan to obtain financing from your retirement accounts. Consult your financial advisor to minimize expensive penalties or fees that may deter you from retiring on time.
Seeking funding for starting a small business from family and friends is an efficient way to get a small business off the ground, as family and friends require a minimal return on their investment. The funding is, however, not open to everyone as not every person finds family or friends willing to invest their funds in a startup. It is a quicker way of securing funding with flexible terms and could be an excellent investment for family and friends, depending on the amount of interest you pay them.
Banks are the less likely sources to secure funding for starting a small business. They usually finance established small businesses with private money loans. Small business owners and startup entrepreneurs criticize financial institutions and banks for failing to fund their new businesses. Banks are strictly limited by federal banking laws and are barred from investing in startup businesses. An already established business has enough assets that serve as collateral, and banks provide loans to small businesses according to the accounts receivable or the company’s inventory. Most small business financing via bank loans is based on the personal collateral of business owners, including home ownership.
A bank loan program sets aside funds for small businesses based on the lender. Do your due diligence when shopping for lenders by talking to real individuals when seeking funding for starting a small business. The process allows you to establish the required paperwork and gives insight into how you can improve the chances of approval. Chatting with actual individuals at multiple local banks ensures you secure the best fit.
Angel investment is often available for small businesses during their early stages. Angel investors are individuals or groups who provide business owners with funding for starting a small business during the early stages of growth. Just like venture capitalists, investors usually focus on startups with a high potential for growth during their early development stages. Angel investors can offer various funding levels, take a measured risk, and are more flexible than traditional financial providers. Some angel investors offer investment and seed funding and act as mentors, and you can discuss this with a prospective investor if it is something you are interested in.
Most angel investors care about the passion, quality, integrity, commitment of founders, and the potential of a small business to grow. You must compose an elaborate business plan, early evidence of traction toward the project, and the viability of raising additional funds if there is progress. You can find an angel investor through your lawyer, angel investor networks, and other entrepreneurs. You can also get an introduction to an angel investor through other angels or friends, and such investors are more likely to invest in sectors they know very well. Serial entrepreneurs are ideal for securing funding for starting a small business and bringing other crucial benefits, including advice and counsel, contacts with prospective customers, connections to prospective employees, strategies of similar companies, and marketplace knowledge.
Crowdfunding raises the funding for starting a small business from a group of individuals. Crowdfunders are not considered investors as they expect no return on their funds or receive any ownership share. Instead, the individuals get a gift from the company as a reward for their contribution. The donation can be in the form of the products you sell and other special perks, and crowdfunding is a popular option for business owners with plans to produce a physical product or creative works. The approach is popular as it is a low-risk endeavor for business owners who retain total control over their companies and have no obligation to repay if the plan fails. There are different crowdfunding platforms, and you must go through the fine print with the help of a business attorney to understand your legal and financial obligations.
Develop a compelling story regarding your company, product, or service to ensure a successful crowdfunding campaign. You must set up the profile of your business on a crowdfunding site and describe the company and the money you plan to raise. Rewards-based crowdfunding campaigns are a popular option as entrepreneurs are not burdened with principal repayments or interest compared to small business loans. Equity crowdfunding enables you to sell stock in exchange for cash but requires strict compliance with state and federal securities laws. You are advised to hire a business lawyer with the required expertise to facilitate bookkeeping services to enhance the success of your campaign.
Government Funding Opportunities
Government grants are available to small business entrepreneurs, but there are strings attached to the financing program. The contributions are directed to businesses that are in line with multiple policies the government focuses on, including community business projects, non-profit organizations, and Eco incentives. These business grants and funding programs are the best solutions if you want to operate in the listed sectors. The eligibility criteria for startup grants are sometimes strict, making the funding opportunity viable for a few businesses. Business owners are advised to check for any business incubators in their business areas to secure funding for starting a small business during the business launch.
Consider Small Business Administration (SBA) Loans
The business law prevents SBA from lending to small businesses directly. Instead, SBA provides a guarantee program for loans by credit unions, non-profit lenders, and qualifying banks. Ask about SBA loan programs among credit unions and banks, including the listed popular programs.
7 (a) Loan Program
Entrepreneurs can use such loans to expand an existing business or launch a new startup. 7 (a) loans and proceeds cannot be used to finance changes in business ownership, repay an equity investment in a business, and repay delinquent taxes. Entrepreneurs seeking funding for starting a small business comply with various SBA standards to qualify for a 7 (a) loan. The SBA does not provide loans to companies that have failed to repay previous government loans. Special loan packages under the 7 (a) umbrella, such as the SBA Express Program, offer a streamlined approval procedure for up to $350,000 loans. SBA-backed 7 (a) loans are ideal for established small businesses with the required financial paperwork that demonstrates their viability.
These loans provide small business owners up to $50,000 to fund expansion and startup costs for small businesses. Business owners can use them to finance supplies, new equipment, working capital, or inventory for the company. Borrowers cannot use the loan to repay any existing debt, and the loan must be repaid within six years. Intermediary lenders require personal guarantees from small business entrepreneurs and collateral. Microloans are ideal for entrepreneurs with few assets or weak credit scores with minimal chances of qualifying for an SBA 7(a) loan or a traditional bank loan. Most microloan lenders are community-based, offering specialized programs for specific industries or demographic groups.
Incubators and Accelerators
Incubators work with innovative companies to allow the founder to generate revenue from a promising idea. Incubators provide mentors with relevant connection networks, coworking space, money, and legal support by working with business attorneys to secure business insurance. Most incubators are backed by venture capital investors seeking the next unicorn startup.
Accelerators work with already established businesses that are consistent in their industry. Business owners spend several months or weeks working with mentors to avoid common pitfalls, refine their business plans, and multiply their revenue quickly. Accelerators provide funding for starting a small business in exchange for a stake in the company. Entrepreneurs must complete the application process to enroll in an accelerator or incubator program. Requirements differ, but small business owners must demonstrate the potential of their business to grow as the competition is usually fierce.
Ways to Make the Business Attractive to Lenders and Investors
Develop a Clear Investment Structure
Investors are interested in business owners with a clear investment structure before investing. Hire a legal professional from a reputable law firm to handle legal issues such as possible liability exposure to attract more investors. Develop a stockholder agreement laying out the obligations and rights of each owner, including the options should the owner decide to sell. Once you develop a clear investment structure, you can negotiate details with investors.
Write a Business Plan
Compose a robust business plan and present it to prospective investors and banks. The business plan must convey your passion for the small business and include a personal story. You must perform detailed market research to fully understand the industry you want to venture in and the direction you wish your business to take. Ensure to back up the plan with financial projections, including a marketing plan, a transparent business model, and strategies for hiring a workers compensation lawyer if any worker gets injured.
Build a Credit Score
Before applying for funding from online lenders, you must establish your personal and business credit score. If you have a low credit score, you are advised to take the required steps to raise the score by removing derogatory items or paying down any existing debt. You may opt to open a business credit card and use it each month by paying off the remaining balance on the due date. The approach improves your credit score and is helpful for business owners who want to build their credit score quickly.
Crunch the Numbers
Investors are more likely to provide funds to small businesses with a high return on investment. Creditors, on the other hand, are interested in how small companies profit financially before providing business owners with loans. Crunch those numbers in your startup to instill confidence in creditors and investors and contact insurance companies to safeguard your business against any risk. Display the financial track record of your business, including the debt level and the cash flow accumulated. Lay out a clear plan of how you will achieve financial goals and when investors can get their return on investment if your business is new.
There are multiple options for securing startup capital, and you have to weigh the downsides and benefits of each one of them. You can mix and match various funding sources to launch your startup and generate profit.