How to Get Funding For a Business
Whether you’re just starting out or have been in business for several years, how to get funding for a business is one of the first key questions you’ll likely ask. When it comes to financing a business, you have many options to choose from, some of which cater to businesses at certain stages. While traditional business loans may be tough to get for startups, you can turn to personal savings, friends and family and possibly even professional investors.
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Decide how much funding you need
Wondering how to get funding for a business? Your first step will be to determine how much funding you need, and what you’ll use it for. Are you planning on buying real estate? Investing in new machinery? Expanding your business with new hires? After deciding how much financial support you’re looking for and why, you’ll be able to figure out your best funding options.
Things you need to get your business ready for funding from investors or lenders
Once you decide how much you need and what’s attainable, it’s time to find funding sources. When you’re looking for funding, investors or lenders will likely want to see the following information:
- Business plan: A business plan can be written in the format that best fits your business, but essentially it’s a guide of how your business is structured, how it’s run, and its growth opportunities, among other details.
- Legal documents: The type of documentation required may vary depending on your business structure — consult potential investors or lenders regarding necessary documents.
- Tax filings and recent bank statements: Potential funding sources will likely ask for these as proof of your annual revenue and profitability.
- Business credit score: As new businesses don’t have past financial records to rely on, loan eligibility will likely come from your personal credit score. However, as your business grows, you will develop business credit, which is different from personal credit. It’s important to keep both your business and personal credit in top condition, as these numbers will impact your potential to borrow, among other things.
Self-funding your business
Self-funding is fairly typical for startup businesses that, due to their short time in business, may not have the track record necessary to get traditional business loans. Some owners may prefer self-funding, as it allows them to maintain full ownership and control. Here’s how to fund a small business, if you’re looking to self-fund your enterprise.
“Rollover as Business Startup” (ROBS) is an opportunity for business owners to invest their retirement account funds into their new enterprise, without paying taxes or being penalized from using the funds early. This can be a risky option, as you could lose your retirement savings if the business does poorly.
Bootstrapping is using your own financial resources to fund a business. This might include your personal savings or money borrowed from friends and family. While bootstrapping can enable you to maintain complete ownership of the business and help you stay out of debt, your business growth may be slower since you’re restricted to using only the funds that you have access to.
Debt-based financing for small business
If you’re researching how to fund a business, various types of small business loans have likely appeared in your search. We’ll discuss different types of loans, what scenarios the funding is intended for, and other things to be aware of when considering the loan type.
Business term loan
Business term loans are a traditional form of business financing, where you receive the funds up front and then pay it back in regular installments. Traditional brick-and-mortar banks commonly offer long-term loans, but they can also be difficult to obtain, as they can have stringent eligibility requirements. You can also find online lenders offering short-term loans that can provide quick access to funding.
Business line of credit
Some small business owners use business lines of credit as funding sources for shorter-term costs. Because business lines of credit are flexible, renewable sources of funding, you may find that it’s helpful to have access to a credit line, in case unforeseen expenses arise. There are different types of lines of credit with different amounts, and they can be secured (with assets, or other types of collateral) or unsecured.
Equipment financing is meant to provide funds to purchase equipment such as buying machinery or a new delivery car, for example — things that allow you to grow your business. You can typically obtain this type of loan from alternative lenders or banks and credit unions, and collateral for the loan is the equipment itself. By the end of the loan term you’ll own the equipment. You may benefit by potentially claiming the equipment’s depreciation as a tax deduction, but you’ll also be responsible for maintaining it over its useful life. Weigh your options to determine if equipment financing is a smart business choice for you.
The U.S. Small Business Administration (SBA) guarantees certain business loans, making lending less risky for lenders, as well as making it easier for small businesses to find funding and obtain access to capital. SBA loans come in a variety of different loan types, intended for different businesses and purposes. These loans feature long repayment terms and competitive interest rates, and some of them come with business education and support.
Working capital loans
Working capital loans can provide businesses with regular capital to help pay for business expenses when there might not be enough cash flow. They can also help with costs like seasonal inventory demands or staffing fluctuations. Working capital loans are usually short-term loans, but can also be lines of credit, invoice or accounts receivable financing, or SBA loans, and can come from banks or online lenders.
Microloans are smaller loans, commonly up to $50,000, designed to help small businesses expand. They’re typically used to rebuild, re-open, fix, or better a business. When seeking a microloan, the SBA is a popular option businesses turn to, as they work with intermediary lenders to provide funds. (An SBA microloan can’t be used to buy real estate or pay off existing debts.)
You could consider taking out a personal loan for business use, as it may be easier to qualify for since a personal loan is determined by your personal credit score and assets. However, as with any debt-based financing, there are risks involved — if you’re unable to repay a personal loan, you will be held personally responsible.
Other ways to fund your business
In addition to standard debt-based financing or self-funding your business, there are several other options to get funding for your business:
Venture capital is a way to fund a business through investors who provide financial backing in return for partial ownership. It can be an attractive option for startups, as high-risk businesses with fast growth tend to appeal to venture capitalists.
Some business owners may want to consider crowdfunding as a potential source of financing, there are many popular crowdfunding platforms such as GoFundMe or Kickstarter. Each platform has its particular niche, so you’ll want to find the platform that best fits your needs. Just make sure you understand your platform’s fee structure and its policies first.
Small business grants
Small business grants, available both through the federal government and private corporations, offer free money to businesses, which makes them very appealing — but also quite competitive. Business grants from the federal government can be found through programs such as the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR), as well as on the government website grants.gov.
Small business credit cards
Small business credit cards can be a useful way to keep business and personal costs separate, as well as to help keep your business spending organized. Business credit cards may be fairly easy to obtain, but since they can come with high APRs, a good practice is to pay off your statement in full each billing period to avoid paying interest. There can be lots of different card options, so before getting a business credit card, make sure to do your research and pick the card that best meets your specific situation and needs.
Where to get business funding
When researching how to get funding for a business, you may feel overwhelmed with all the options. Here’s an overview of potential sources when it comes to funding a small business.
|Funding source||Best for||Type of business financing|
|Traditional banks||Debt financing|
|Credit unions||Debt financing|
|U.S. SBA||Debt financing|
|Online lenders||Debt financing|
|Venture capital||Equity financing|