If you’re trying to grow your current small business, or are beginning to set a new one up, several options can help you and others fund your small business.
Some of these will be better for your circumstances than others, but If you’re not sure where to start, you’re in the right place!
We’ll cover 10 of the best ways to finance your small business in this post. We’ll also tell you about the things you need to know before you search for funding, as well as the types of grants that may help your particular company.
New Business Requirements
Before we get into the ten best financing methods, it’s important to understand what you need to know before you start looking for funding.
The first involves noting down the things you need and the things that can wait. In other terms, what’s the least you will need to get your business up and running?
This is the most important thing, but you still need to factor in the necessities. If you have categorized anything in the ‘can wait’ group, make sure that other areas won’t be affected if these factors don’t receive funding.
The following are examples of popular company expenses, as well as the related questions you should consider before looking for finance:
Payroll
What number of employees are there, what are you paying them, and how many workers will you have in the following half a year?
Small companies and startups may become larger later, so consider how many employees you will need to begin, as well as how many workers are needed before you begin seeing profits.
Remember to factor in how you’ll pay yourself, as founders of startups need to live!
Insurance
Will you and your company be prepared in the event of a disaster? Are you going to offer your employees' health insurance?
Taxes, Permits, Licensing
Business is a money game, so you need to ensure that you don’t fall into any legal issues. Think about how much is needed to cover taxes, permits, and licenses.
Utilities & Rent
If your company has a physical location, ensure that you can afford the utilities and lease to keep the business going. Always check that you understand the commercial lease terms before you sign a contract.
Equipment
Will you need phones, computers, or other types of equipment? Can you lease or rent any items to save costs? Will you need PPE (personal protective equipment) to protect you and other employees?
Web Page And Advertisements
A decent web page and effective advertising are necessary to let others know about your business. You might need to rent billboards, put ads in local newspapers, or buy social media ads.
Upcoming Orders & Inventory
Will you have sufficient raw stock so your company continues operating, or should you invest more?
Extra Costs
Will your workers or will you need to travel? Can you hire any consultants for advice? Will you need to hire a lawyer to manage business matters, like trademarks or copyrights?
10 Best Options For Financing A Small Business
Now that you have an idea of the things to consider before looking for funding, here are ten of the best methods to fund your company.
Remember that there’s no one correct method to finance your company. Some methods may work better for various phases of the company, while other businesses may prefer to use a mix of funding methods.
Here are ten of the best methods to finance a small business:
1. Standard Loans
You may not have a present credit history if your company is new. If this is the case, lenders will examine your personal credit history before deciding if you should have a loan.
A credit history is a record of how immediately you pay your bills. It’s used for lenders to work out how risky it is to lend to you. Conventional lenders, like banks, are careful about who they lend to.
You might not have many options in the conventional lending sphere if your score is under 680.
However, if your company has been running for over two years, your credit is good, and you have earned a minimum of $100,000 a year, traditional lenders may offer you particularly good interest rates.
2. Digital Lenders
If your credit score isn’t good, or your business is new, you can look for some well-known online lenders for loans.
A survey conducted by the Federal Reserve found that 22% of the companies questioned applied for finance with online lenders.
3. Personal Loan
If your personal credit score is high, but your business is new, you could take out a personal loan to fund the company. However, bear in mind that your personal credit can be severely affected if your company fails.
4. Microloans
Microloans are smaller loans that are usually under $50,000. These tend to be handed out by individual people instead of conventional lending establishments.
Government organizations, like the SBA (Small Business Administration) may also offer these, as well as nonprofit organizations. These may be a good choice if you don’t need to borrow a lot.
5. Self Funds
Many are taken aback by what they can achieve when funds are low. Self-funding your own business can also help you secure loans later on, as this shows dedication and perseverance.
However, this depends on your financial situation, as you will need to afford to invest your capital and see if your money is enough to reach your targets.
6. Entrepreneurial Investors
If you’re not aware of the entrepreneurial community in your area, this is a good location to find individuals who want to invest in your ideas and company.
Carefully research local venture capital companies and investors, then work on agreeing on the terms surrounding your company’s arrangement.
7. Crowdfunding Sites
This method involves pitching your company idea to popular websites, like Indiegogo or Kickstarter, to receive pledges to finance your product or company (see also 'Financing A New Product [What You Need To Know]').
The success of this revolves around your web content knowledge and how well you can market your business and yourself.
8. Family And Friends
This is one of the riskier financing methods, but it may be successful if you treat the scenario professionally.
Any family or friends that help you finance your company should earn equity or interest in it. Make sure that they receive monthly payments and that all the necessary paperwork is complete.
9. Invoice Factoring Companies
Invoice factoring involves an enterprise selling its remaining invoices to a factoring business.
This company will repay the enterprise a percentage of how much the invoice was worth, generally 75-90%.
After the invoice is completely paid, the factoring business will pay your company the rest of the invoice, though they will take away a factoring fee and any charges.
Invoice factoring is different from loans, but it may help businesses with cash flow problems. As the process isn’t a loan, factoring companies will use your client’s credit scores to decide whether or not to work with your small company.
10. Small Grants
A lot of corporations, government agencies, and non-profit organizations offer people money to set up or grow their small businesses (see also 'How Is A Small Business Valued? [Selling Your Business 101]').
A few of these grants are open to any small company, while some target particular demographics, like minority, veteran, or women-owned enterprises.
Government Grants are available at the state, local, and federal levels for various kinds of businesses and conditions. Some examples of government grants are MDBA loans and the SBIR program.
General Small Business Grants are from bigger and non-profit enterprises. These give small businesses funding and grant opportunities depending on their industry and eligibility. Examples include the Dream Big Awards and the GoFundMe Small Business Fund.
Industry Specific Grants are ideal for small businesses with a particular niche, or those that perform in a specialist industry. However, these grants aren’t offered to every small business. You need to look at the eligibility rules and requirements before you apply. Examples include the Jobber Grants Program and the Etsy Emergency Relief Fund.
Diversity Business Grants are schemes that aim to help underrepresented minority groups and communities. They offer mentorships, networking options, and financial assistance. Examples include the Black Founder Startup Grant and the Amber Grant Foundation.
How To Choose A Funding Method
The methods above are all good options to fund small businesses, but if you’re finding it difficult to choose one, here are some questions that can help you come to a decision.
- How much funding do you require and what will you use the money for?
- Can you afford to take on any debt at the moment?
- Do you prefer one method of borrowing capital over others?
- What does your revenue look like?
- Do you need to make any changes to be eligible for your preferred funding method?
- Is your credit score good?
- How long has your business been running?
- Do you own collateral?
- Could you take your business ideas and story to investors?
- Is your business plan concrete enough to take to conventional lenders or banks?
The Bottom Line
Any funding method you choose should help your small business, it shouldn’t burden you with lots of debt. It’s important to select a finance method that suits your financial situation and can help you reach your enterprise targets.
Have a read of our ten best funding methods above and look at the related questions, as this will help you decide which finance option is best for you.