How to Successfully Finance Your Small Business
Small businesses are hard work. As a small business owner, you need to be prepared to deal with everything from product development to customer interactions. More importantly, you also need to find a way to finance your small business.
Luckily, you have many options when it comes to financing your small business. Whether you are seeking funding for your latest business or working on your first big idea, there are many avenues to secure your funding.
Keep reading for a comprehensive review on financing your next business venture.
An obvious way to fund your business is through a business loan. Even if you do not have a proven track record as an entrepreneur, you do have options.
Before you ask for money, make sure that you understand why you’ll need it. You are more likely to secure a business loan if you have a clear plan.
If your business has been around for a while, then you will have an easier time securing a loan. When you approach the lender, bring all of the documents you might need such as your business and personal tax returns, financial statements, and business legal documents. Be prepared to field questions from the lender about the nature of your business.
If you are a new entrepreneur without any financial statements for your business, then you need to take a different approach. Although it may not be required for some loans, it is a good idea to prepare a business plan and map out exactly how you will use the money. Make sure to include projected cash flows and future earnings for the next 5 to 10 years.
Small Business Administration-Backed Loan
The Small Business Administration (SBA) backs loans to help entrepreneurs across America to start or grow their businesses. Although SBA does not directly fund the loans, it works with lenders to reduce the risk involved and create more opportunities for lending.
As a small business owner, you can take advantage of competitive rates to find a loan that will take your small business to the next level.
Microloans are for business owners that do not need a lot of capital to get started. If your business plan involves a low amount of capital investment, then a microloan could be a viable option. Generally, any amount under $50,000 is considered a microloan.
In many cases, the requirements to qualify for a microloan are less strict than typical bank loans. If you are having trouble securing capital by other methods, then this may be a better option.
Investors and Venture Capital
If you know that you have a great idea but do not have the capital to move it forward, then finding an investor that shares your vision can be invaluable. Behind many successful businesses are collections of investors that funded their growth.
In order to find the right investors, you will need to research venture capital firms to understand which would best understand your business. Investors are more likely to invest in something that they understand.
Research VCs' other companies to learn what they have invested in and what they value in an entrepreneur.
With that in mind, research the other companies of venture capitalists (VCs) to learn what they have invested in and what they value in an entrepreneur. Some VCs also prefer to invest in a business at a certain stage. For example, if a VC prefers to invest in a company in stage A, then do not approach them for seed money. Find the VC that has invested in businesses like yours in the past. Make sure to understand the goals of your investors before making the pitch.
Find an Incubator
If you are looking for more than just capital to grow your business, then working with a startup incubator can be a useful step. An incubator is best for a founder that is focused on growing their business at the right pace. If you are having trouble getting your young business off the ground, then an incubator could provide the right mentorship to work through your business problems.
Find an Accelerator
A startup accelerator works similarly to an incubator because it provides mentorship in addition to capital. However, the goal of an accelerator is to move the business forward as quickly as possible.
An accelerator’s mentorship term is much shorter than an incubator’s. It may not be the best path for companies that need more assistance to help take their business to the next stage.
Small Business Grants
Although loans are viable ways to fund your business needs, you may be wary of taking out a loan. Even if you want to take out a business loan, it can be difficult to qualify. A great option for any small business is a small business grant. Federal agencies, state agencies, and even private companies may offer small business grants.
Although the process to apply to a small business grant can be tedious, it is well worth the effort. Here are a few good places to start looking for your small business grant:
- Small Business Development Centers in your local area
- FedEx's small business grant
- The U.S. Department of Economic Development
You are more likely to be awarded a small business grant if you can show the positive impacts it will have on your community.
Take the time to make a stellar application. You need to communicate the goals of your business clearly to the application reviewers. Look for business grant opportunities that align with your business’s needs. Some small business grants are offered specifically for women or minorities; seek out those opportunities if they are available to you.
You are more likely to be awarded a small business grant if you can show the positive impacts it will have on your community. These positive effects could be either economic improvements in the area or social justice related. Finding a way to give back to your community as a small business is a good step towards building a lasting impact.
If you have a great idea that easily solves a problem, crowdfunding is also a viable option.
Businesses with unique, easy-to-understand products often amass the money they need through crowdsourcing. A good place to start with this approach is through Kickstarter. If donors like your idea, then they will donate money in exchange for a promised reward. Typically, Kickstarter campaigns run for a few weeks to build the needed capital to build the products.
Another crowdfunding option is selling equity in your business. Fundable is a platform that helps you raise funds by selling your equity in an easy-to-track method. This platform reaches thousands of people who may be interested in your business idea.
Although it may seem like you need an endless supply of cash to start a business, this may not be the case.
Raising money from outside investors or business loans is not the only option you have. Most businesses do not need more than a few thousand dollars to get started. If you are wary about taking out debt for your young business, consider finding a way to fund the business yourself.
Save Money to Bootstrap Your Business
Take a hard look at what your business actually needs in order to get started. Although it may seem like you need an endless supply of cash to start a business, this may not be the case.
Instead of asking outside investors to fund your business, take the leap and invest in yourself. As the founder of your business, you should have a clear direction of where you want to go and how you will get there. If you believe that you can make it happen, then consider a responsible investment in your business.
Once you have made the initial investment, allow the earnings of the business to continue building its momentum. If you are smart with your resources, you may not need to provide additional funds for the business to grow.
Secure a Personal Loan
If a business loan is not an option and you do not have the savings to fund your business, consider a personal loan. However, you should think carefully before making this decision. Make sure that you can afford the loan regardless of your business’s success. Otherwise, this option may be too risky.
Ask Family and Friends
If you need outside investors for your business, why not start with friends and family? You know that this business is set up for success, so inviting your loved ones into the opportunity can be a generous gesture.
However, proceed with caution before mixing business and family. Consider the relationships involved before inviting a loved one to invest in your business. You can always ask, but be prepared to painstakingly explain each financial detail of your business. Even if someone is very close to you, they may not be willing to jump in without a clear understanding of your business plan.
If you have family or friends with expertise in business, consider asking them for advice as well.
Although financing your small business can be challenging, you have many options.
Before you seek funding, make sure you truly understand exactly how much money you need to take your business to the next level. Whether you are launching your business or developing a new product line, it is important to clearly define your business’s finances. Without that, it will be difficult to secure the right funding.
How to Successfully Finance Your Small Business
This blog post was published by Axos Bank on August 6, 2019 and last updated on August 9, 2019.