Small Business Funding: How to Finance Your Small Business
Small company funding can be daunting for the uninitiated. Get up to race with this overview of the most common financial help.
Whether you’re operating alone as you start your corporation or need to staff up, you’re going to need money to help cover expenses until your operation is self-sustaining.
Small business funding begins with a well-researched company plan that helps determine how much money you need to succeed. If you’re increasing capital, it helps lenders and investors decide if the concept is viable and a low-risk investment.
There are several funding options available, but not all are appropriate for every business. Here’s a breakdown of the most common.
Self-Funding
Lendio reports that 77% of small company owners funded their business with personal savings in 2018. Also known as “bootstrapping,” self-funding is often the only choice for owners who don’t authorize loans.
Matthew Meier, the founder of Grand Canyon tour provider MaxTour, thinks saving up is “the best way to fund your small business.” While working full time, he picked up a second, part-time job for a year and mounded that extra income for his new business. “This lets us start with zero debt,” he says.
Customer Funding
Why not let customers support early expenses?
“I’m a big fan of pre-sales, suggesting, selling something to a limited number of early adopter clients for a below-market price,” says Stephanie Sims, author of Funding Your Firm Without Selling Your Soul and founder of Finance-Ability.
Alternatively, she recommends asking clients to pre-pay more upfront in exchange for enticements that could include no charge for future upgrades or other features or services that later clients won’t receive.
Loans
Unorthodox to popular belief, bank loans can be hard to obtain for a fledgling business. “Most people don’t comprehend that a bank will not deliver loans without collateral to back it up in case of a default,” adds Stephen Halasnik, managing partner of Financing Solutions.
Still, if you have a good personal credit score, have been in the company for at least two or three years, and can show that you can pay back the loan, a commercial loan could be your growth solution. When Stephen Light, co-owner of Nolah Mattress, needed to borrow, he turned to online lending platform Lendio, saying, “We were gaining momentum in the market, but our cash discharge wasn’t enough for scaling.”
Some business owners borrow from friends and family or even from their life insurance policy, while others turn to the equity in their houses. “Borrowing against the home remains a fairly common option for entrepreneurs in need of startup funds, but losing your home is a serious risk if you can’t make your loan payments,” says Grant Ferguson, CEO of Unsecured Funding Source.
Crowdfunding
Crowdfunding, an increasingly popular choice, allows you to use online platforms that include Kickstarter and Indiegogo to raise money through assistance from many individuals. It works best when your funding project is an innovative gadget, tool, or product.
It’s also effective at helping you gauge the idea’s potential in the marketplace. “Some ideas can go viral and achieve the funding target within days, and then you are good to go. Others may never reach $100 and stay dead in the water,” says Stefan Smulders, founder, and CEO of social media automation tool Expandi.
Investors
Your idea might be big sufficiently to attract investors. Whether they’re “angel” investors—individuals using their own money—or venture capitalists investing pooled money from a professionally-managed fund, they will need equity in exchange for capital.
Venture capital allows you to avoid debt but it isn’t for everyone. Businesses that accept investor funds do so comprehending that the end game is to take the company public or to sell it—since that’s how investors recoup their acquisition.
“Investors make a bet that the funds they invest in your company today will be returned with huge returns when you sell your company,” Sims says.
Ask for Advice
Struggling to comprehend what’s right for your situation?
“If you’re not sure where to start, set up an arrangement for a free consultation with a nonprofit business community, like a small business development center. They can walk you via your options, including investor funding and micro-lenders,” says Anna Serio, Finder.com’s certified commercial loan officer.
An attorney or accountant with a background working with startups will also be able to help.
Investing in professional suggestions early on will help you make an informed small business funding decision with confidence.
