Finding Funds for Your Small Business – 5 Funding Sources

Get the Jump-Start You Need_ Finding Funds for Your Small Business

Are you planning to start a small business? Then you need also to plan everything related to finding funds.

You’ve made a smart decision. Entrepreneurship isn’t just the heart of the American dream. It’s also the heart of the American economy.

However, it’s one thing to start a business and it’s another thing to grow it into a successful entity. Of the over half a million businesses that start every year, only about 20 percent will live beyond a decade.

There’s also another challenge: funding your new business.

Entrepreneurs turn to a wide range of sources, including personal funds, small business grants, equity investors, and commercial loans.

In this article, we’re telling you how to find small business grants, as well as explore other funding sources that might be suitable for your business.

1. Small Business Grants as an Ideal Source of Startup Capital

Securing a grant is every entrepreneur’s dream.

Why?

It’s basically free money. When you’re awarded a grant, there’s no requirement to pay it back to the granting organization.

Unfortunately, grants are super hard to secure. There are thousands of businesses gunning for a piece of the grant and the requirements disqualify most businesses.

Don’t be discouraged, though. It’s possible to find small business grants and get the money. You just need to know where to look for them.

Business grants are typically issued by the federal government through the Small Business Administration. The agency runs a number of funding programs, including:

  • Grants for research and development
  • Grants for exporting
  • Grants for nonprofits
  • Grants for coronavirus relief

In general, you aren’t going to qualify for an SBA grant if your business is yet to open its doors. You must have been in operation for a certain period of time, which can vary depending on the funding program you’re applying it.

To stand a strong chance of securing a grant, it helps to build a business that offers a product or service that solves a social problem. For example, if yours is a medical startup that’s involved in the development of a coronavirus vaccine, you could easily secure a grant for research and development.

The government isn’t the only source of grants. There are lots of well-established nonprofit organizations offering grants to businesses in specific industries.

Women entrepreneurs, for instance, can access grants from organizations that focus on minority groups. Check out these helpful resources to learn more.

Once you’ve identified an ideal grant program, don’t rush to make an application. Take your time to study the requirements and prepare a solid application.

2. Using Personal Funds to Start a Business

67 percent of entrepreneurs use their own money to start and operate a new business.

Self-funding is an ideal option because you don’t have the pressure to spend the money according to somebody else instructions. Neither is there the pressure to pay it back. If the business fails, the loss is yours.

Most entrepreneurs who self-fund turn to their personal savings. If you’ve got some money in your savings account, take the risk and use it to fund your business idea.

If you’ve got little or no money in savings, don’t look beyond yourself yet. You could sell a valuable asset that belongs to you, such as land or equipment. Some of the most successful entrepreneurs started out through bootstrapping.

Borrowing from family and friends is also an attractive idea. As long as you’ve got a solid business plan, the people closest to you won’t have a problem contributing to your business idea.

The biggest drawback to using personal funds is you might not be able to raise enough startup capital.

Let’s say you need $15,000 to start a business. However, you’ve only managed to raise $10,000 from your savings and other personal sources.

This is a decent amount, but resolving to start the business without the entire amount would be a massive mistake. If your business doesn’t start generating revenue soon after starting up, you might run out of working capital. The missing $5K might be what you needed to keep the lights on until the business becomes sustainably profitable.

3. Secure a Small Business Loan

Instead of starting your business without adequate capital, there are other sources you can look into. A small business loan will naturally be your next alternative.

Debt financing has its well-documented share of drawbacks. First, a loan incurs interest, which means you’ll pay substantially more than you borrowed. Second, defaulting on the loan can have major consequences on your business, especially if the loan is secured against business property.

Now that the downsides are out of the way, securing a small business is a good way to fund your business, as long as you’re funding a venture that’ll succeed.

Before you get approved for a business loan, your lender will ask for a number of documents, including your business plan and credit report. Getting approved certainly means the lender believes your business will be profitable or at least generate enough revenues to repay the loan.

When going in for a loan, focus on finding traditional lenders who have a reputation for making loans to small business entrepreneurs. With such a lender, you’re more likely to secure a sizeable loan at a low interest rate.

There are mistakes to avoid when you’re using debt-financing.

Avoid applying for short-term, high-interest loans. It’s understandable that you might be in urgent need of finances, but expensive loans will only make your situation worse.

Also, take out one loan at a time. Servicing two or more loans at the same time might be too big a task for a small business like yours.

4. Crowdfunding

Crowdfunding is becoming an increasingly popular way to raise additional business capital. Experts estimate that by 2025 crowdfunding platforms would have raised a whopping $300 billion.

Crowdfunding can work for your business, as long as you know what you’re doing.

Start by identifying a platform that will best enable your campaign to get the attention it deserves. The key to a successful campaign is ensuring as many people as possible see the campaign.

A lot also depends on the nature of your business. More people will be willing to crowdfund and own a stake in the business or buy your product before it’s ready for shipping if it solves a pertinent problem.

Don’t expect to have a successful crowdfunding campaign if your business is selling confectionary. But if your product is unique and functional, many people could be interested.

Keep in mind that crowdfunding comes with a big responsibility. Random people on the internet are entrusting you with their money. If the promise is to ship them a product within a certain duration, keep the promise; otherwise, you’ll hurt the reputation of your small business.

5. Equity Capital

If you’re familiar with the hit TV show, Shark Tank, you probably have an idea of how equity capital works. Entrepreneurs pitch their ideas to investors “sharks” looking for an investment in exchange for a stake in the business.

It’s simple, really.

If you own 100 percent of your company and you need some capital, you can give away 20 percent of the company in exchange for capital. Whoever gives you the money will now own a fifth of the business.

Of course, there’s some math that goes into determining how much money an investor can offer you at a certain valuation, but you get the point.

Equity capital typically doesn’t come with repayment obligations. Anybody who acquires a stake in your business is taking a risk. If the business fails, they lose their investment. 

It’s for this reason equity investors do a lot of due diligence before investing in a business. And when they do, the business will have high growth potential.

As such, if your business has the potential to quickly grow into a big company or go public, equity capital could be an ideal source of funds. Just take care not to give away too much of your business too early.

Alongside equity investors, it’s also possible to get funding from angel investors.

Unlike equity investors who are more into backing established startups with a proven business model, angel investors have a reputation for investing in businesses at the earliest stages.

So, if your business is still in the conception stage, there could be an angel somewhere willing to pump some money into your idea.

Fund Your Small Business the Right Way

Raising adequate capital is a major challenge for most entrepreneurs in the United States. Lucky for you, we’ve fleshed out a number of funding sources, from small business grants to bank loans, crowdfunding, and equity capital. You’re now in a good position to find the best option for your young business. All the best and keep reading our blog for more entrepreneurship tips and insights.