5 Ways to Fund Your Small Business
The business world is shifting due to its ever-growing digital transformation. Amid the doom and gloom of recent events, more people are taking the bold step to become small business owners. Nowadays, there are more options than ever to fund a startup.
If you have enough savings, perhaps you could try self-funding. You could also apply for bank loans or accumulate business funding through online methods. The business landscape is recovering, so make sure your business is there to grow with it!
In this article, we’ve created a list of options for how to fund a small business. We’ll explain the modern funding options, such as traditional lenders and digital crowdfunding campaigns. We’ll list these methods according to how easy they are to obtain. Here are the options we will tackle:
- Save enough money for initial capital.
- Launch a crowdfunding campaign.
- Look for investors.
- Request for a business loan.
- Apply for business grants.
1. Save enough money for initial capital.
If you want to start your own business, it is ideal to use your money. People call this method self-funding or bootstrapping, but they mean the same thing.
As the names suggest, they involve a business owner using personal savings as initial capital. Here are the benefits of using this method:
- You tend to become more responsible in handling your business. After all, you are putting your hard-earned money at risk with every mistake. As a result, you are more likely to polish your business plan and boost your chances of success.
- If you fund the business, you have full authority to run your company. You will not rely on anyone else to support your business, so nobody else can affect your decisions.
You can fund a startup yourself by saving money. Nowadays, you can increase your income by applying for various work-from-home roles. Of course, this strategy has its share of disadvantages:
- It is not easy to save enough money to fund your startup. As a result, you might take a few months to get your business idea off the drawing board. Still, your experience may vary based on your type of business.
- You may take a long time to turn up a profit because every expense will deduct from your savings.
2. Launch a crowdfunding campaign.
You can ask people online to fund your business. Various methods like GoFundMe and Kickstarter can help find people willing to pitch in for your startup.
Contrary to popular belief, this method requires a lot of effort. You will have to convince people that your business idea is worthwhile. That is why crowdfunding sites let you post promo videos.
Your video clip should explain how your business plan works so that people would donate hundreds or thousands of dollars. People wire the funds online, so you might be able to raise money quicker than saving your own money.
However, you will have to promise your supporters crowdfunding goals and keep them. Otherwise, you could damage your brand image and reduce long-term sales. Crowdfunding also costs money because you will have to create effective promotional materials.
3. Look for investors.
You could look to specific individuals and organizations for business financing. One option you can explore involves venture capital firms, who fund small businesses that have promising growth potential. Some of the most prominent venture capital firms include Sequoia Capital and Andreesen Horowitz. You send them your business plan and wait for their approval.
Once the venture capitalists say “yes,” they will hold a minority stake in your company. Also, they will provide the necessary advice to grow your business. The downside is that you may get distracted from your initial business goals. Also, VC firms often prefer tech projects, making them less likely to choose non-digital startups.
Second, you could look for angel investors, wealthy individuals willing to invest in your new business. If you have watched Shark Tank, you have seen them in action. Believe it or not, angels helped secure funding for global firms like Yahoo and Google. Now, the internet has opened this option to more people.
You will have to be hands-on with finding these investors. Look for people in your industry, then reach out to them on the internet. This method has a low chance of success, so it is best to seek funding via other means.
4. Request for a business loan.
Banks and credit unions provide loans to startups, so you may want to try them. However, you have to make sure that you have a good personal credit score.
The Small Business Administration does not set specific credit rating requirements, but its lenders do. Good credit assures banks that you can repay small business loans. A traditional bank typically requires a score of 720, and the maximum is 850.
Credit bureaus use the following criteria to determine your credit score:
- Payment history: 35%
- Credit utilization: 30%
- Credit history: 15%
- Types of credit: 10%
- New credit: 10%
You compete with numerous applicants, so good credit does not guarantee your small business loan. Still, you have many ways to boost your credit, like paying debts on time.
5. Apply for small business grants.
Aside from SBA loans, you could gain financial backing from a nonprofit organization or the government. They provide grants to startups to help the economy grow. Some offer help to minority-owned businesses, such as MBDA loans.
Here are other examples of government and nonprofit grants:
- The Farmers Market Promotion Program aids businesses in the agricultural sector with training and financial support.
- Each US state has a Small Business Development Center that can provide options from the SBA Loan Program.
- Believe it or not, GoFundMe can help fund your business if it suffered due to the COVID-19 pandemic. The crowdfunding program could give you a grant aside from helping you find online lenders.
You can fund your business in numerous ways. You could use your savings as financial resources or apply for a traditional business loan.
You could try modern methods like applying for business credit online. Note that all these methods have their pros and cons. Expect to devote time and money, so be patient. Avoid peer-to-peer lending and payday loans. It is easier to borrow money with these methods, but they could have unexpected consequences for business revenue.
Frequently asked questions
How can I obtain small business funding?
You can apply for a bank loan like other small businesses. Also, you could launch an online crowdfunding campaign or government grants.
How can I finance a business with no money?
You could accumulate startup funding using a crowdfunding platform. Moreover, you could accumulate enough savings instead of borrowing money.
How can I pay back investors?
Potential investors require a specific portion of your profits before they cover your startup costs. You may also want to offer dividends to keep existing investors and attract new ones.