Small Business Funding

Jason Smith

Jason Smith

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Jason Smith

Senior Author

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Contents

How do Small Businesses Get Funding?

 

If you’re about to start a small business, or you already own a small business, you may find it difficult to determine the best way to attain funding. Every business is different – finding the funding strategy that suits yours best can be a complicated task. When business owners refer to funding, they’re not just speaking about finance – funding can come from a range of different sources. Depending on the size of your company, and the industry that you’re operating in, there are a range of different options available in the modern business environment.

We’ve created this guide to small business funding to help you have a better understanding of the various forms of funding available for your business. Many business owners make the mistake of not being aware of the different avenues available to them, and it costs them money in the long run. Consider all the different funding routes mentioned in this article and decide which options are most appropriate for your business. If you’ve ever wondered how to get small business funding, this article is for you.

Investment

Small Business FundingReceiving investment in your company is one of the primary ways owners end up funding a small business. You can sell equity in your company in exchange for capital. This is considered one of the most cost effective ways to raise capital for your business, as you don’t have to pay any interest on the money that you receive from your investor.

Raising money for equity has become synonymous with start up business loans. This is because many startups have very little assets, and therefore struggle to receive any form of capital from traditional commercial banks. Investors are able to give startups the money they need in exchange for shares in the company. Investors hope that the startup will eventually skyrocket in terms of value, which will result in their equity being very valuable.

Despite the various benefits of acquiring funding through investment, there are some disadvantages to consider as well. Below we’ve compiled a list of advantages and disadvantages to consider when deciding if selling equity in your company is the right way to approach investment.

Advantages of Selling Equity

  • Avoiding Costs – You don’t have to worry about paying fees and charges when you raise money via selling equity in your business. Traditional forms of finance often come at a premium that many business owners are unwilling to pay – this is one of the major driving forces behind the popularity of selling equity in companies.
  • No Credit Requirements – When you receive investment you don’t have to meet the credit requirements that often prevent business owners from attaining capital.
  • Downstream Benefits – One of the most undervalued benefits of receiving investment is the strength of your investor. Once someone has put money into your company, they are likely to help further fund projects as they will be trying to ensure their investment doesn’t fail.

Disadvantages of Selling Equity

  • Less Equity for Yourself – Despite the obvious cash flow benefits, the reality is: selling equity means you stand to benefit less from the business further down the road. If you’re someone who wants to own the entirety of your business for the coming years, receiving investment is not the optimal type of funding for your business.
  • Less Control – Depending on the size of the equity that the investor purchases from you, you will most likely have less control over your company. Investors will be able to influence the direction of your business, which you may not be okay with.
  • Not Building Business Credit – One benefit of using traditional forms of finance is that it typically allows you to build a business credit score, which will result in you having more access to credit down the line. For this reason, it’s important that you try and start building this credit score – it can open future opportunities.

Funding via Finance

The other most popular version of funding for small business is through finance. Financing your operations is one of the most viable ways to start the ball rolling in terms of getting your business off the ground. It’s also a great way to invest in technology or inventory if you need to grow your current operations. Many business owners try and avoid financing things because of the stigma surrounding interest rates. But what people don’t realize is that financing certain parts of your business can have a great impact on the future profitability of your company. We’ve outlined the various ways you can use finance to fund your business below:

Traditional Loans

Traditional loans are typically provided by commercial banks to help business owners either start a new business or invest in a current one. This is the most popular form of funding as it typically has lower interest rates and costs less than other forms of finance. With traditional loans, you receive a lump sum of capital which you are responsible for paying back over a set period of time (term). There is typically a fixed interest rate which you are required to pay back along with it. Many traditional loans will have to be secured against assets in your business.

Business Credit Cards

This is a type of finance that businesses typically use to fund ongoing operations, not start businesses. Business credit cards are like personal credit cards, except they are tied to your business. It is a revolving form of credit: you are given a set limit and you only pay back what you use, and only pay interest on what you use. They can be issued to multiple people working within the company, so it’s a great way to have a way for employees to spend money on business needs. Many people use them to have employees entertain clients or purchase inventory for the company.

The only problem with business credit cards is that they charge very high fees for cash advances – if you need to have access to cash in your business, a business credit card should not be the avenue that you take. Because business credit cards are unsecured, they typically have very high interest rates.

Business Line of Credit

A business line of credit is another form of revolving credit. Borrowers are given a set limit on their line of credit and they only pay interest on the money that they withdraw from it. Unlike business credit cards, you don’t have a card facility with a business line of credit. Instead, you will be able to withdraw cash or transfer money from the line of credit to help with your business’s working capital needs. This is a big advantage for many business owners as it doesn’t carry the same hefty cash advance fees that a business credit card does.

Advantages of Using Finance to Fund Your Business

  • Retain Equity – You retain all of the equity in your business meaning if you are successful you will have more of the returns that the company provides. This is a top priority for many business owners, especially those who are looking for small business start up funding – they typically believe their businesses have potential to multiply in value.
  • Retain Control – This is another valued component of getting finance instead of investment. You don’t have anyone with serious influence over your business decisions.
  • Flexibility – There are tons of different forms of finance, which means you’ll have the flexibility to try out a range of different options that will best suit your business needs. Various lenders have different term times and arrangements that can cater to companies in almost any industry.

Disadvantages of Using Finance to Fund Your Business

  • Cost – Because you are having to pay interest and fees on top of what you borrow, the largest downside to financing is cost. This is especially true for certain forms of credit that have particularly high interest rates.
  • Collateral – Often you will have to sign over some of the assets in your business to secure the loan. This means that the bank can seize your assets or business if you default on payments.
  • Eligibility – It can be hard to get financing if you have little credit history or a bad credit report. For this reason, attaining finance is often one of the more difficult ways to get funding for your business.

Other Forms of Funding

If you don’t want to sell equity in your company and you don’t want to take out a loan, there are still other funding sources for small businesses. One of the most common ways that people get funding outside of investment and finance is through a method called factoring. In addition, you can also get grants from the government if your business meets certain requirements. The full details of these forms of funding are provided below.

Factoring

Factoring is a form of funding that is neither debt nor investment. Instead of getting a loan or selling equity, you simply sell unfulfilled invoices to a factoring company who are then responsible for collecting the invoice when it is due. This is a great way to get the capital you need to keep operations going, without having to get approved for a loan or lose a portion of your company. Most factoring companies will provide you with up to 80% of the invoice upfront – and only charge around a 1-3% fee once they have collected the invoice. Because you are selling the rights to an invoice, no debt appears on your balance sheet and it does not impact your business credit score.

It may appear that factoring is only useful for those who are trying to finance their business as it moves forward, but many people use it at the start of their operations as well. For example, if you have a manufacturing company and have received a large order and don’t have the money to start business, you can sell your current invoice to a factoring company for upfront capital to fulfill the order.

One thing that you must keep in mind is that your client will be notified that the invoice has been sold to a factoring company. This is normally not an issue, but can sometimes give the impression that you are unable to meet your financial requirements, which can reflect poorly on your business’ reputation. It is therefore advisable that you notify your clients prior to selling their invoices to a factoring agency.

Small Business Funding Grants

Small business funding grants are another type of alternative funding that many businesses use if they are unable to get enough money through traditional avenues. Despite being a last resort for some business owners, small business funding grants should really be a first port of call as it is effectively free money.

Small business grants are a form of government funding for small business. They provide small amounts of cash for qualifying business owners. Many of these grants are reserved for individuals of a certain background – you should research to see if you qualify for a small business grant – it truly is free money. This small business funding program is specifically designed to help small business owners with little capital. The government has created the initiative to pinpoint certain segments of the population, as well as certain business types, that they feel have a positive impact on society. Researching grants prior to looking for investment or finance is a great way to save yourself money in the long run, it can also be used as collateral. Small Business Loans for Minorities can also be a part of this.

Verdict

After reading this guide you should have a clear idea of how to fund a small business. It may sound like an arduous process, but considering all your options prior to making a decision can be the easiest way to save yourself money in the long run. Many business owners make the mistake of taking the first funding opportunity they’re offered – don’t let yourself act in haste. In addition, if you’re looking for finance, make sure to ask the lender for a total cost and break down of the loan your receiving. Hidden interest rates and fees can sometimes lie inside various loans. If you have further questions, our website has a range of great resources on how to get funding for a small business – like this business loan calculator –  make sure that you check it out.

FAQs

There’s plenty of information online, but it can sometimes be hard to find answers to specific questions about small business financing and funding. This page is dedicated to helping our readers find the answers they need to get business started on the right foot. Make sure to read through all of the questions on this page to get a comprehensive understanding of small business funding and financing.

Small Business Funding FAQs

If you have questions about small business funding, you’ll be able to find plenty of useful information in this section of our website.

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How do small businesses get funding?

Small businesses typically get funding through a wide variety of different funding methods. These typically include external investment, small business loans, other forms of financing, and crowd funding. The type of funding that you seek will depend on your business and your credit history.

How do I get funding to buy a business?

You can seek funding through investment, bank loans, SBA loans, and other forms of financing. If you already own a business, you can also borrow money against the value of your current business. If you have a good credit score or a solid business history, you’re more likely to get funding to purchase a business.

What is funding of a business?

Funding of a business is providing the capital a business needs to operate. It may also include the capital that it takes to purchase a business or invest in certain components of a business – such as buying equipment.

What are the funding options for small businesses?

Small business owners in the modern world have a range of different funding options. They can use regular bank loans, SBA loans, peer-to-peer loans, investment, crowd funding, and plenty of other options.

How much do angel investors invest?

This depends on the investor and the business – there is no clear cut guide to the amount an angel investor will invest. Angel investors typically provide less capital than venture capitalists.

How do I get my business funded?

There are plenty of different options for funding. You should consider a personal injection of cash, SBA loans, regular bank loans, investment, crowd funding, or other available funding options such as peer-to-peer lending.

How do I attract investors to my business?

Attracting investors to your business can involve a range of techniques. First you should have a solid business idea coupled with a good business plan. Next, you should advertise your business to investors by tapping investment markets that are interested in your niche. Networking can often be key in attracting investment in the modern world.

How do investors get paid back?

This will depend on the terms of the investment. The remuneration involved in investment should be agreed upon prior to any investment.

How do you attract investors to a business plan?

You’ll need to take a comprehensive approach to attract serious investors to a business plan. This being said, you should ensure to provide a clear picture of why your business is worth their investment. Gear the pitch towards their specific interest or desires in a business. Make sure your plan is organized and answers key financial questions investors may have.

What is business angel funding?

Angel funding is a type of funding that involves angel investors. Angel investors are typically wealthy individuals that provide start-up capital to entrepreneurs or small business owners.

How to get funding for a non-profit business?

Non-profits are able to take advantage of a range of different funding opportunities outside of  a normal business’ scope. For example, many non-profits can take advantage of grants, gifts, and other forms of financing that other business owners don’t have access to.

How to use go fund me to start a business?

If you have a great idea that may have social impact, you might be able to raise money on Go Fund Me. Keep in mind, this will most likely work better for non-profit businesses. People are not likely to want to donate their money to a for-profit enterprise.

How to get free funding to start a business?

There are a range of government and private grants available to small business owners. If you’re running a non-profit business, it will be easier to take advantage of this form of funding.

How can joint venture programs be used to fund business?

Joint ventures can help you increase your funding because you have multiple people involved in the starting of a business. You can benefit from multiple sources of capital and use the borrowing power of multiple individuals to fund the business.

How to get funding for a business with bad credit?

Funding a business with bad credit can be difficult. Fortunately, there are still plenty of online lenders and traditional lenders that lend money to people with bad credit. SBA loans are also sometimes an option. Government grants can also be used to fund businesses without the need for good credit.

How to get funding to start a small business?

You can obtain funding via traditional loans, online loans, peer-to-peer lending, business grants, investment, and a range of other funding mechanisms. The possibilities are endless in the modern world of business.

How to get funding for a startup business?

If you run a startup, it can sometimes be hard to obtain funding. Many startup owners turn to angel investors to help fund the start of their businesses. In addition, people may be able to obtain SBA loans as a startup. You can still apply for regular financing, but it can be hard if you have a risky business plan.

Who can fund my business?

Almost anyone can fund your business if they wish to invest money in your company. In addition, lending institutions can also provide you with funding. As can grants and government organizations.

Which type of funding requires that the business owner share ownership with investors?

Most forms of investment funding will require business owners to sell part of their ownership to the investors. For this reason, some business owners tend to prefer to fund their businesses through financing.

How to get funding for an online business?

Online businesses can receive funding just like any other business. You can search for funding through traditional lenders, SBA loans, online lenders, grants, investment, and other normal funding avenues.

How to fund a new business with credit cards?

You can fund a new business with credit cards by paying for obligations using the cards. In many ways, this is not recommended, as credit cards typically have much higher interest rates than other forms of funding.

If you are unable to secure funding, what are the alternatives to starting your own business?

You can fund a business with your own money or credit cards, though this is not advisable if you cannot afford it. You can also look into government grants and other forms of free funding that can help you get the money you need.

How to find grants to fund your business?

If you’re looking for grants to fund your business, you can head to grants.gov to find a full list of government grants. In addition, you can search online for private organizations that also provide grants to small business owners.

What is the most common source of funding for starting a small business?

There are plenty of common sources of funding for starting small businesses. Many people use external investment, business loans, personal loans, SBA loans, personal assets, and other forms of necessary funding.

How to fund your business for new hires?

If you’re looking to hire new employees, you’ll need working capital to pay their salaries. Seeking investment or financing is typically the best way to ensure you have enough money to pay your new employees.

What is angel investor funding?

Angel investor funding is funding provided by an angel investor. Angel investors provide capital to start-ups and other young businesses – they’re typically wealthy individuals looking for returns.

How to fund a business with no money?

If you don’t have any money, you may need to seek investment or try and obtain a small business grant. It can be hard to obtain financing if you don’t have any money to put down as a down deposit.

How to get funding for a business idea?

You’ll typically need more than an idea to get funding for your business. We suggest that you come up with a business plan and assess the financial viability of your plan. Financing firms and investors will want to know you have a solid plan in place before they help you with funding.

if you get equity funding for your business, what will you have to do?

If you receive equity funding, you’ll need to issue your investor with equity in your company. You will need to seek assistance from a lawyer if you want to ensure this is done correctly.

How to get government funding for a business?

You can receive government funding by heading to grants.gov and searching the government grant database. Here you’ll find a range of different government grants that can help you get free funding for your business. You can also look into SBA-loans, which are government backed loans provided to small business owners.

How to get private funding for business?

Private funding typically requires you to create a solid business plan and apply for financing at traditional lenders. You may also seek investment, but this will also typically require a solid business plan to attract credible investors. Private funding can sometimes be harder to source than SBA loans or government grants.

How to raise funds for business start-up?

Many business start-ups raise funds through angel investors, grants, and other forms of finance. Start-ups can sometimes have trouble obtaining traditional forms of finance because they have risky business plans. For this reason, grants and investment are great avenues for those seeking start-up funding.

How to get funding for a business?

If you’re like to get funding for a business, you should consider a range of different financing options, grants, external investment, and internal investment. Using a comprehensive approach is a great way to ensure you get the amount of money you need!

How to write a business proposal for funding template?

You need your business proposal to be as professional as possible. There are plenty of templates and examples online available for free. You can also hire a writer to help ensure the project is as professional as possible.

Small Business Loan FAQs

This portion of our FAQ page covers small business loans and related topics.

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How do you qualify for a small business loan?

To qualify for a small business loan, you’ll need a solid business plan. In addition, you’ll want a solid personal credit score if you don’t have a business credit score or previous business credit record. The small business loan requirements will depend on the lender you’re working with.

What is a good credit score for a small business loan?

This will depend entirely on the lender. Most people prefer to have a credit score of above 700 when they apply for loans, but you should check with your lender before you make this decision. Some lenders will require even higher credit scores if you’re planning on borrowing a large amount.

Do SBA loans require down payment?

Yes. Most SBA loans will require you to put down 10-20% of the value of the loan to be eligible for financing. For this reason, SBA loans can be quite hard to acquire for people with limited capital.

What are the best financing options for a business?

This will depend on the business. Typically, you should be aiming to receive financing at as low of a rate as possible. For this reason, traditional business loans and SBA loans are both popular options for business owners.

Where can I get a business loan with bad credit?

It can be hard to get a business loan with bad credit, but there are now plenty of online lenders that provide different business loan opportunities. If you’re having trouble with traditional lenders, make sure to check online!

Is it hard to get a loan to start a business?

It can be if you don’t know how to approach the process. Make sure to prepare your credit profile and come up with a solid business plan. This will help you ensure you have a higher chance of receiving approval.

What does a business usually need to secure a bank loan to fund its operations?

If you’re looking to secure a bank loan, you’ll typically need a large asset such as property, vehicle, or heavy equipment. There are still financing options available that don’t require this form of financing.

Other FAQs

If you’re interested in other small business funding and financing related topics, you might be able to find relevant questions and answers in this section of our article.

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Can I buy a business with no money?

Technically, if you found investors or loans that required no down payments you could buy a business with no money. This being said, typically you’ll need some capital if you want to get the best interest rates.

Do angel investors get paid back?

Yes. This may either be in the form of cash or in equity in the company. Angel investors do not provide free capital.

What is the difference between an angel investor and a venture capitalist?

Angel investors and venture capitalists both tend to provide capital to start-up businesses. The major difference is that angel investors are typically much smaller than venture capitalists. Venture capitalists will typically only make significant investments in companies.

How do I find investors for my business?

To find investors for your business, you’ll need to start putting together a solid business plan. Most investors will want evidence that your business idea is viable. In addition, you should begin networking in investor circles that are interested in your niche. There are also companies you can hire to help find investors for your business.

How do you finance a business purchase?

To finance a business purchase you’ll need to apply for a loan from a lender. If your business purchase is a large asset, you can typically finance it through securing the loan against the asset you’re purchasing. For example, you can secure a loan against the value of the property you’re purchasing for your business.

If you’re looking for additional help with small business funding, make sure to check out some of the other content on our site. It’s essential that you understand the importance of small business funding and how it can ensure your business idea gets off the ground. Don’t wait around for your business to fund itself – finding capital to start a business requires proactive effort. Our website is a top resource for all small business related subjects!


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Jason Smith


Jason is a Senior Author for SBL. He has been working with small business owners like you for the past ten years. He graduated with an MBA and began a career as an independent financial consultant for small businesses in his state. 

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