Sources of Funding for Your Business

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Articles

• Review: Best Small Business Credit Cards 2024
• What Is Working Capital?
• How to Get a Small Business Loan
• Business Factoring Loan
• Business Term Loan
• Microloans
• Small Business Grants

Types of Small Business Financing

Small businesses have a plethora of financing options at their disposal, each tailored to different needs and stages of growth. From utilizing personal savings as a bootstrap method to navigating the complexities of commercial loans and investors, the journey to secure funds can vary widely. 

Sources of Funding for Your Business – Transcript

For a small business, cash is the oxygen that your business needs to start and stay alive. And to have enough cash to pay for your business's operations or to take advantage of a profitable opportunity that arises, small business owners may need to consider financing options. 

But the idea of taking on a loan may be a bit intimidating – especially if you're not familiar with how loans work, what financing options are available for your business, how to get financing, who you should rely on for your business's financing needs, and what safeguards you should consider when taking on a loan for your business. Not to worry, though – we'll be covering everything that you need to know about small business financing in this video. 

Hey everybody, Will Scheren here from Small Business Startup Guide by TRUiC This video is part of a larger course dedicated to helping small business owners cut through the noise and get to the essentials of starting and operating their business. If that sounds like it would be really useful to you, be sure to like and subscribe. 

When to consider financing for your business – earlier in the course, we reviewed the pros and cons of financing your business with debt versus financing it by selling equity in the business to investors. Be sure to go back and watch that video for a refresher if you need it. There's two scenarios in which your business could begin a search for financing. Either through debt or investors. If at any point your business will not have the cash on hand to fulfill its obligations surrounding normal business operations, or if a profitable opportunity arises for your business that requires you to be able to have cash to be able to capitalize. 

Types of small business financing – let's take a look at the types of financing that's available to small businesses. Small business financing can be broken down into a few categories that either fall into debt or equity-based financing. The most common types of business funding are: self-funding, using your own assets, friends and family loans, small business loans, small business credit cards, small business grants, angel and venture capital investors, and crowdfunding. 

Self-funding your small business – the most common funding for small businesses comes from the owners' personal savings. Self-funding your business may involve personal funds and assets, credit cards, and personal loans. Funding your business this way is as easy as moving funds from your personal bank account to your business bank account. However, you'll need to make sure that this money is properly recorded as a loan or equity investment in your company's accounting records. 

Friends and family loans – after self-funding, friends and family loans are typically the next place that businesses will turn for funding. Friends and family are often your biggest supporters. They're often more likely to offer friendlier terms that don't rely on collateral or credit reports. When friends and family provide loans, they're often able to consider providing funds with lower interest rates or longer terms than a bank would be able to offer. However, when discussing financing for your small business with friends and family, it's important to keep it professional. Conversations surrounding money can put additional stress on even the closest of relationships. We recommend reading our Friends and Family Loans guide to help learn how to keep your relationships intact when money gets involved. 

Small business loans – small business loans are another popular form of funding your business. Small business loans allow you to fund your business without giving up equity. There are many different types of business loans available from banks and other lenders, the most common type being Small Business Association or SBA small business loans. These are the most common type of small business loans, and they're backed by the SBA. You can get more information on how to apply for a small business loan using the link below this video. 

Working capital loans – a working capital loan is a revolving credit line typically extended through a bank. The funds are made available to a business for practically any business purpose. The borrowing business only pays interest on the money used, not the total amount borrowed. For more information on working capital and working capital loans, use the link below this video. 

Business term loans – a business term loan is the standard traditional loan type in which a business borrows money, usually from a bank. The money is handed over as a lump sum to be paid back over set intervals over an extended period of time. 

Business factoring loans – a business factoring loan means selling your business's unpaid accounts receivables. You decide which unpaid accounts receivables you want to sell to a factoring company, and once accepted, they'll issue you money. The factoring company charges a fee for this and takes the balance of the amount that they agree to pay you in the amount of debt owed. For more information on business factoring, using the link below this video and check out a blog article that we wrote on it. 

Microloans – business microloans are smaller loans, typically ranging between $5,000 and $50,000. Search for and get in contact with a microloan lender to get access to microloans. While these type of loans generally offer longer terms and have lower barriers to access, interest rates on them can be higher than traditional term loans. 

Merchant cash advance loans – a merchant cash advance lender extends a loan to a business in exchange for a percentage of future credit card transactions. Like microloans, these type of loans may offer lower barriers to entry. 

Small business credit cards – another important source of funding for small businesses are small business credit cards. There are many different types of small business credit cards, each with its own mix of interest rates, fees, benefits, and rewards. Earlier in the course, we discussed how to select the right credit card option for your business. So be sure to go back and watch that video on selecting the right credit card for your business. 

Grants – small business grants are free money, meaning they don't have to be repaid. They're provided by federal and state governments, nonprofit organizations, as well as some corporations. Grants typically provide money for a specific purpose or to a specific demographic. For example, there are a number of small business grants explicitly for women, minorities, immigrants, veterans, and even felons. Since grants are free money, they're often highly competitive. There's also a significant amount of work that both goes into the application process and tracking and reporting what the grant money was used for. 

However, since your time is the only thing that you have to lose, many people find pursuing grants a worthwhile endeavor. A popular place for searching for small business grants is SBA.gov. The SBA, or Small Business Association, partners with many organizations to provide financial assistance for small businesses. If you do not find any grants that you qualify for with the SBA, your next stop should be grants.gov. The US Government Grants database gives you access to thousands of grants, including hundreds for entrepreneurs and small businesses. You can use the link below this video to get a guide for the best small business grants. 

Angel investors and venture capital investors – if you plan to grow your company exponentially, consider working with professional investors. Angel and venture capital investors give more than just money to the businesses they support. They can often provide additional experience and resources to help your business expand at a rapid pace. 

Angel investors are high-net-worth individuals or a group of individuals who invest startup capital into entrepreneurial endeavors. In exchange, they get convertible debt or equity in the venture. Angel investments are a very popular way to raise startup capital that can be leveraged towards the business. Although the business seeking angel investments will need to give up ownership or equity and sometimes even some decision-making and control in their company, angel investors and investor groups may be able to provide valuable guidance, advice and network connections. 

Venture capital, or VC, is a type of private equity in which venture capitalists provide seed, startup, and early-stage capital to ventures with high growth potential. Venture capital is another way to raise startup capital that can be leveraged towards the business. Although startups seeking venture capital also need to give up ownership and even more decision-making and controlling their company, venture capitalists are often able to provide valuable advice, guidance and network connections. 

Crowdfunding – crowdfunding or raising money for a new project or venture from a large number of people, has become an increasingly popular way of raising startup capital. Crowdfunding allows entrepreneurs to bypass traditional sources of funding and go right to their users, supporters, and fans to raise capital for startup projects and new ventures. Crowdfunding raises startup capital while also allowing startups to gain exposure, build awareness, and validate their ideas. There are four types of crowdfunding: 

Donation-based crowdfunding – a type of backer-funded crowdfunding where the campaign creator asks backers to contribute to a campaign without any type of reward or stake in the venture. It's the oldest and one of the most popular types of modern-day crowdfunding. Donation-based crowdfunding is most often associated with charities and social causes. In general, those who support donation-based crowdfunding are primarily motivated by philanthropic principles and find reward and contributing to the social good. The most popular donation-based crowdfunding platforms include platforms like GoFundMe, Fundly, and RocketHub. Although the pros of donation-based crowdfunding are readily apparent, individuals and for-profit ventures may have difficulty relying on the charity of the crowd to raise startup project capital. 

The most popular type of crowdfunding for entrepreneurial projects and ventures is reward-based crowdfunding. Think Kickstarter or Indiegogo. In reward-based crowdfunding, campaign supporters are promised a reward for contributing to a project. Most often, rewards include products or services that the campaign was created to fund. Furthermore, unlike other types of new venture capital, reward-based crowdfunding does not require that startups incur additional debt or to give up ownership or equity in their venture. 

Lending-based crowdfunding is a type of investor-based crowdfunding where campaign creators solicit unsecured loans from a crowd. Asking supporters to invest in projects with the promise of future repayment plus interest. Examples of popular lending-based crowdfunding platforms include LendingClub, Prosper, Funding Circle, and Kiva. Compared to other forms of crowdfunding, lending-based crowdfunding does not require giving up any equity in the venture, nor does it require campaigns to offer rewards to supporters. On the other hand, unlike backer-based crowdfunding models, the capital raised through lending-based crowdfunding has to be paid back to the investors in your campaign. 

Equity crowdfunding – in equity crowdfunding, startups offer equity in their ventures in exchange for their campaign supporters' investment. Equity Crowdfunding provides the potential to combine some of the benefits of crowdfunding with a funding structure similar to traditional funding options. Examples of equity crowdfunding platforms include AngelList, CircleUp, Fundable, and Crowdfundr. 

Business financing safeguards – because there are so many business financing options to choose from, and since each of the options involve some level of risk, selecting the right financial option for your business when you're in need of some cash can be a paralyzing task for business owners. Here are some best practices for you to be more confident in your financing decisions. 

When it comes to receiving funds through investors rather than debt, business owners should weigh two variables: their ability to receive funds through debt and any additional value that an investor would bring to the table. 

For successful businesses, giving away equity for cash is expensive in the long run. However, if a business is in need of funds, and they don't have the personal connections to obtain the funds through a loan, and they've not established the credit that they would need to obtain a loan, then finding investors would be their only option. 

However, if a business owner is able to project that an investor would provide more value than the cost of the equity that they require to invest, then obtaining financing through an investor would be the premier way for the business to inject cash into the business. For example, if a business is currently planning to be netting $10,000 in profit a month from their current sales channels, and they find an investor who's willing to provide some needed cash flow to the business in exchange for a 50% share of the business, and the investor has business contacts that could cause the business to reasonably assume that their monthly profit would more than double to over $20,000 a month, then the business should strongly consider using the investor to cover any needed financing. 

When it comes to loans, business owners should know that generally, loans that are required to purchase assets that would allow for a 1.25 debt-service coverage ratio are generally considered reasonable risks to undertake. A debt-service coverage ratio is calculated by dividing the projected monthly profit that the asset that is being purchased from the loan would generate for the business by the monthly loan payment. If this number is greater than or equal to 1.25, then common business practices would argue that taking on the risk of this debt in order to obtain the asset would be considered reasonable. However, obviously just because a loan is obtained with a 1.25 debt-service coverage ratio, it is not guaranteed that the loan would be a good idea, as the future cannot be predicted with surety. Business owners should make all decisions surrounding loans while taking into consideration their own risk tolerance. 

Where to get a small business loan – if you're interested in getting a loan for your business, use the link below to check out the best small business loans for entrepreneurs. 

Hopefully, this video has provided you some further clarification on loans and will make the process of obtaining any needed financing for your business a little smoother. And with that, this section of the course is complete. In the next section of the course, we’ll be taking a look at creating a brand for your business. 

This video is part of a step-by-step course that provides business owners all of the essential information for starting and operating their business. We've provided a link below this video for you to get access to all of the free and discounted tools we’ve mentioned in this course. 

Be sure to like and subscribe to get more of this content. We'll see you in the next section of the course, and if you have any questions, let us know.