Funding Your Small Business

Small businesses account for 99.9% of all US businesses. And there are many benefits that come with having a small business—control over lifestyle and schedule, financial independence, job security, and tax breaks just to name a few. Funding is important to small businesses to get off the ground, cover daily expenses, make inventory purchases, and hire staff. Having enough funding also allows small business owners to seize opportunities that come their way. While funding sources can come from a variety of options, self-funding (aka bootstrapping) may be your best option to get capital into your small business.

Self-funding

The more you have invested in your small business, the more likely you are to succeed. This applies not only to the energy and motivation you pour into your product or service, but also to the cash investment you contribute to this cause. What’s more, bank lenders consider the amount of money invested by the owner when evaluating a loan decision. Similarly, investors look for entrepreneurs who exhibit financial commitment through the amount of cash they put into their business.

Pros: Self-funding can mean easy access to funds. You don’t have to spend time searching for cash, there is no need to complete loan applications, and there are no interest payments. Furthermore, bootstrapping allows entrepreneurs to retain full control in decision making and over profits.

Cons: Circumstances can change quickly; therefore, the use of personal savings brings with it a level of risk that can affect you personally. Small business owners that tap into personal savings to stay afloat can compromise their own financial well-being.

Other Funding Sources

Bootstrapping can be limited—you are constrained by what you can afford to invest, you could miss out on opportunities to grow your business, and your cash could fall short of what is needed to survive. There are other funding sources available for small business owners outside of personal savings. These options include bank loans, Small Business Administration (SBA) loans, crowdfunding, and venture capital from investors.

Bank Loans

Equipped with a business plan and personal financial information, you can seek funding through traditional bank loans. It can be more difficult to secure a loan for a startup business compared to an established business. This is due to lenders evaluating risk on financial stability and the history of a business. As such, delaying loan requests until after establishing revenue can help increase the odds of securing a business loan.

SBA Loans

The SBA has made it easier for small businesses to get access to the funds they need. Benefits of SBA loans include lower down payments with rates comparable to non-guaranteed loans. Eligibility for an SBA loan is based on what a business does to receive revenue, the characteristics of ownership of the business, and the location of business operations.

Crowdfunding

A popular funding source that has no credit score or collateral requirements, crowdfunding funds are derived from small donors among a crowd of people. Donation-based crowdfunding involves people giving to a campaign for nothing in return. Conversely, debt-based crowdfunding involves pledges backed by a loan that must be repaid with interest by an established deadline.

Venture Capital from Investors

A non-debt alternative to small business funding involves venture capital from investors, which is typically used by small businesses and startups that anticipate high growth. Small businesses accept funds from venture capitalists in exchange for equity in the business. Venture capitalists invest pooled money from a professionally-managed fund and seek to be rewarded with returns in the future when the small business is sold.