How Small Business Owners Can Raise Funds: Commonly Overlooked Methods

Jason Smith

Jason Smith

Senior Author

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Jason Smith

Senior Author

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With the ongoing global economic recession and great financial uncertainty, most small-business owners are having to struggle miserably to get funding for either expansion of operations or tiding over periods of cash crunches. This is more so with the regulatory environment stalling.

How Small Business Owners Can Raise Funds: Commonly Overlooked Methods

Banks are wary of lending money readily. Moreover, the erstwhile boom in venture capitalism and availability of private-equity capital seem to have died down. Also in the tech sector, IPOs that were so common only a few years ago seem to be missing.

These factors in their totality have made it extremely difficult for many smaller companies to get their much needed financial support. This has led to a situation where they have no other alternative but to think outside the box to secure investment capital for growth or to branch into new ventures. The irony however, is that most small business owners tend to commonly overlook the following alternative methods to raise funds.

Government grants

For those companies that belong to the biotech or other research-based sectors, government support is usually available in the form of grants. Those cities having state colleges and universities also generally have research centers and provide financial aid to such small-business owners, particularly those who head startups.

You could always get a suitable grant provided you present your case well and complete the formal application process properly and correctly. Moreover, if the business’s prime mission happens to be closely tied up with government agencies like the US Department of Energy or Agriculture, the US SBA or Small Business Administration is also another worthwhile resource and any new biotech startup focusing on research-based development stands to qualify for any suitable SBA grant.

On the flip side, any startup looking for funds to launch a new smartphone app or retail store could find securing government aid more difficult. However, all businesses have the liberty of approaching philanthropic organizations for private-sector grants like the Bill & Melinda Gates Foundation. In the US, there are also special grants for businesses owned and run by women and women entrepreneurs would do well to approach them for funding, if required.

BDC borrowing

BDCs or business development companies also exist to provide funds but these again are often overlooked by a multitude of small-business owners. Loans from BDCs can certainly be an attractive finance option for smaller companies which have been refused loans by banks just because of their size but are financially sound nevertheless. A BDC usually gives out loans at higher interest rates as compared to banks, but without tying the loan to the business owner’s personal assets. This is indeed a great additional advantage as the loan is of an unsecured nature.

In most cases, BDC terms for loans are more flexible than traditional lenders. Additionally, a part of the loan is convertible into the company’s equity. The reputed BDCs have a specialized team of venture capital experts that support and advice cutting-edge companies that are well positioned in a growing and promising market. These teams actually seek out startups and approach them with attractive loan offers to help them establish themselves.

This financial arrangement is particularly beneficial for those startups that need the capital fast. The BDC makes a direct cash transfer to the business and could re-negotiate terms in future, depending on the successful performance or failure of the business.

Online lending

It was predicted in 2015 that online lenders would be able to touch upon 70 percent of small businesses in future because of their willingness to help or bail out small businesses by processing applications online. In fact, companies like Kabbage, OnDeck and SnapCap have earned a considerable reputation among borrowers for their ability to take loan decisions fast and in disbursing loans to parties within days. Even though web-based lenders charge more interest than banks, the prime advantage is that chances of securing the loan are much higher and even those with insufficient or weak credit scores stand to get money.

A survey conducted by the New York-based Federal Reserve Bank in 2014 showed that online lenders approved over 38 percent of all applications they received. The conventional banks, on the other hand, had a lower approval rate of 31 percent. The report also revealed that community and regional banks had significantly higher approval rates but their interest rates were also higher with more inflexible terms.

The online process however, involves some essential elements to ensure success. You need to have your finances in order and provide some solid documentary support that confirm that your business is indeed viable and will repay the funds its borrowing. You can start with a properly registered business name, tax ID number and checking account.

Moreover, use state-of-the-art accounting software to manage your finances and accounts with efficiency and accuracy. Once all this information is available digitally, it will be easier for you to keep track of finances and also prove your credibility as a prospective loan candidate.

It would also be a prudent move to segregate your business finances from your personal finances. Paying off invoices with credit cards or personal checks run the risk of overcomplicating finances or attracting negative comments from auditors. Have a separate credit card and bank account to cover all your business spending. Moreover, all loans come with a fine print which has to be read and understood very carefully before inking the deal and to avoid extra or unnecessary loans fees, originations, interest or any other costs.

Another important aspect is to research each lender in terms of his customer service, prices etc. This is more important as you are unable to meet him personally and he may turn out to be troublesome later. Remember, the loan with the lowest price may not always be the best as it may carry hidden costs. It also pays to be careful about those lenders who ask for an application fee payable upfront or immediate down payments before the loan gets approved.

These three options are quite ideal for those who have been refused loans by traditional bankers. Use these tips to carefully weigh your options and get the necessary funding required to take your business to the next level.

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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