Best Funding Options for Your New Small Business

Funds

By Eric T.

Starting a small business requires capital, and running it requires reliable cash flow.  According to an Intuit survey, 64 percent of small businesses start with $ 10,000 or less. You can also start a micro business with as little as $ 3000. 

However, we don’t always have that kind of money at hand. 

And if you have financial issues such as a bad credit score or lack of collateral, some institutions are unlikely to offer your startup capital. 

Many people shy away from starting small businesses due to the hurdles associated with accessing capital. 

But there are many sources of funds for small businesses you can try. 

Here are 9 funding options for new small businesses.

1. Savings

Your first source of funding for your small business venture should be yourself. You must have at least some money put aside to start your dream enterprise. 

The biggest advantage of funding your business is that it entitles you to all the profits and gives you full ownership of your enterprise.

However, if you choose to fund your business with savings, avoid pouring everything into your venture. It’s always advisable to keep something for a rainy day. 

You could take a portion of your savings for capital and borrow the rest from your 401K. 

401K loans can get you up to $ 50,000 or half of what is in your account, depending on which amount is less. 

If you get the loan, you will be expected to pay it back with interest within five years, which is enough time to get your business off the ground and make it profitable.

2. Family and friends

If your savings are not enough to start a business, family or friends are another option. 

You never know; they may have some money put aside and are willing to fund or invest in a viable business idea. 

However, if you do get into such an arrangement, it’s best to have a written agreement to ensure no one is taken advantage of. 

A written business agreement will govern how you deal with losses, profits, and equity distribution, should your friend or family member decide to take part or full ownership of your business.

3. Partner financing

TeamYou can access funding from another player in your industry in exchange for partnership status.

A partner can contribute funds, skills, and products or services, to boost the growth of your business. 

In many cases, accessing funding through a partner means sharing the running of your business and giving them part of your profits. 

But if you choose a partnership, find someone with a similar outlook and vision to reduce conflict.

For example, if you want funds for a restaurant, you can do it with a chef or experienced restaurateur.

Additionally, ensure you have a business partnership agreement to help you solve or prevent arguments that may arise in the course of operations.

4. Low-interest credit cards

Yes! You can fund your small business with a credit card. 

Although we often use credit card funds for living expenses, they can also help us fund a business enterprise. 

Most people don’t take this route because the credit card interest rates are pretty high. But you can do it with a low-interest credit card if you borrow the amount you need in small amounts, to avoid exorbitant interest rates. 

If you do decide to fund your business with credit card funds, you’ll benefit from the flexible paying plans and the fact that, unlike some credit sources, you are not required to justify what you’ll spend the money on when borrowing it.

5. Invoice financing

Your business invoices can also help you to access funding for your business. 

Invoice financing, also known as invoice factoring, involves accessing money against your invoices that you can use to pay suppliers and employees or reinvest in other business needs. Here is how it works. 

  • You sell goods or services to customers and, in turn, sell the invoices to a financier who will give you a loan against them.
  • Once the invoices are paid up, the financer gets their money back, including any fees they charge you. 

Invoice financing works for business people who give their customers long periods to pay for goods or services, such as 120 days.

This gives them a chance to unlock cash held up in unpaid invoices to keep the business running without having to wait until they get paid for their goods or services. 

Invoice financing doesn’t require collateral or lots of paperwork, and it gives you cash to grow your business and even get new projects running as you wait for old ones to pay off.

6. Bank loan

Although more time-consuming and challenging than credit card funds, bank loans can get you more funding than most options. 

However, you can expect the bank to scrutinize your finances, ask for collateral, a business plan, and bank statements, before they give you any funds. 

Therefore, expect some challenges such as a lengthy application process and a stringent eligibility criteria. 

However, bank loans are the best funding option if you want to keep control of your business, as long as you make prompt payments. And if you choose the right institution, you can get funds under favorable interest rates.

Some business loans you can apply for are Small Business Administration (SBA) loans, start-up loans, equipment loans, microloans, and commercial mortgage loans.

7. Venture capitalistBusiness Partners

If you don’t mind other people having a share of your business and profits; and your idea is profitable, venture capitalists are a funding option. 

Venture capitalists are a good fit for anyone with no collateral to back a loan but who has a business idea that will generate enough income to pay any funding accessed through investors. 

It works for people with competitive business ideas, such as inventors.

Venture capitalists are often people with an interest or knowledge in the field you want to start a business in. Therefore, access to their funds, as well as their other  resources, can boost your business growth significantly.

However, you can expect them to play a significant role in the running of your business by offering money and skills, equipment, and connections.

8. Grants

Grants are funds offered to certain businesses by governments and other institutions to ease their start-up process. 

These businesses get funds for their ideas because they are likely to help local communities or ease specific problems in society. 

Therefore, if your business offers scientific solutions such as research, you can apply for a grant. 

However, keep in mind that the organizations offering grants expect you to show what you do with their funds, and if it is government-funded, you should meet federal developmental and research goals to qualify.

An example of an organization that offers grants is the Small Business Administration, which offers funds to eligible businesses through initiatives like the Small Business Technology Transfer program.

9. Community development financial institutions

There are non-profit community development organizations in your area ready to provide capital to small businesses like yours.

They help start-ups and growing businesses in low-income areas to get off the ground or expand.

These CDFIs are in almost all US states and they receive funds from the private sector and government.

They are better than most institutions when it comes to offering business funding because they don’t ask for things like credit scores and collateral.

If you’ve been dealing with issues such as COVID -19 challenges that have interfered with the running of your business resulting in low credit scores, you can apply for a commercial loan for your business from a community development financial institution in your area

Conclusion

These are a few funding options for your small business. Before you approach any of them, prepare yourself with the documents that can improve your chances of getting a loan, such as a business plan, good credit score ratings, financial statements, and collateral, where possible.

If you lack any of these documents, don’t be discouraged, as there are institutions on the list that will give you funding if you have a sound business idea.

However, before you pick a funding option, think of factors such as your current financial status, whether you want complete control of your business,  and, how you plan to pay back your loan, to ensure you make the right choice.

At the end of the day, it’s up to you and what you want for your business. But these options will give you an idea of where to start if you are looking for funds to start your business.

About the Author

Eric T. is a content specialist at Thor Capital Group, a direct lending firm that offers uncommonly flexible options for working capital to small and mid-sized businesses in need of financing to improve or grow their well-earned place on the street. When not hunched over his computer thinking loudly, you can find him playing pop music with his band, reading horror novels, or traveling.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.