Even with a great idea and a strong work ethic, small business owners need funding to help with their business’ growth. Especially when a business hits a rough patch, as all do at some point, funding can be the difference between failure and a minor bump in the road.
However, acquiring funding isn’t as simple as putting your business out there and seeing the investors roll in. There’s a variety of investor types and debt and equity funding methods.
With debt funding, the investor receives a note in exchange for cash, with the note detailing terms of repayment such as interest and timing. Debt allows an owner to keep ownership of their company, though there’s the obligation to repay. Failure to repay can force a business into liquidation.
Equity funding involves the owner turning over an ownership stake to an investor in exchange for the investor’s cash. Although there’s no obligation to repay the investor, the investor will effectively own a chunk of the business unless you buy them out, which can be costly.
Both debt and equity funding are worth considering for small businesses seeking avenues for funding. The best way to approach funding is to do so based on the type of funding:
Angel investors are affluent individuals who provide capital in exchange for ownership equity or convertible debt. As opposed to institutions, angel investors use their own money and often have expertise related to the industry in question. They have a stake in your business’ success, so a great angel investor can provide funding in addition to expertise.
Unfortunately, angel investors can be rather difficult to find, though not impossible. Groups formed by angels include Funding Post, helping connect entrepreneurs with angel investors. The Angel Capital Association is another outlet for these connections. Being active in your industry, at events and trade shows, also presents opportunities to meet angel investors in your field.
A venture capitalist is along similar lines, though these are often looking for a controlling interest.
Many business owners that struggle to find funding resort to self-funding, often entailing personal savings or by selling assets to generate cash. Many successful business owners have embraced a minimalist lifestyle for a period so they can self-fund. Although self-funding is not feasible for everyone, it’s worth evaluating your assets to weigh its potential.
Similarly, one can look at friends and family for equity or debt funding. It’s worth keeping in mind, however, that mixing business with family and friends can lead to sore feelings if the business falters. Friends and family as investors is a risky proposition that should be avoided.
Cloud funding involves pitching your ideas to investors digitally. Ideally, a great pitch will result in multiple investors contributing funds to the idea. Restrictions certainly apply, though cloud funding is a viable funding avenue that’s very accessible, which is especially accommodating to busy investors who do not have the time to meet face-to-face.
Strategic partnering can help with funding. Whether or not the partner becomes an employee of the business, taking on a knowledgeable and fiscally-equipped partner is a viable method to increase funding. Partnerships can be especially useful if two partners can fill a void in their respective businesses by partnering, such as a property management business partnering with a legal firm that specializes in property management. The legal firm may contribute funding on the condition that they represent the property management business legally.
Sites like Kickstarter make crowdfunding a recognizable pathway to funding for a variety of things, whether it’s helping to save for a pet’s medical bills or a business seeking general funding. Regardless, crowdfunding enables anyone to become an investor. Instead of offering an ownership stake, crowdfunded investors typically receive perks instead, such as in the form of discounted products or a direct line of communication.
The Small Business Administration has a variety of loan programs that often require a guarantee to repay the loan. A lending partner provides a loan to a small business, making it easier for them to have access to capital. SBA-guaranteed loans tend to have comparable rates and fees to non-guaranteed loans, with some loans offering counseling and educational support. Businesses seeking SBA loans must be a for-profit business, do business in the United States, have invested equity and cannot get funds from any other financial lender.
Banks also make small business loans, though often require a lengthier track record and may use your assets to secure the loan. Businesses can also establish overdraft lines of credit with banks, where the bank establishes an account limit and the business owner can withdraw up to that limit even if the account does not have the money. The overdraft amount collects interest as high as the primary rate plus five percent.
Small Business Lenders
There’s a variety of organizations specializing in lending to small businesses. These lenders want to be secured by assets, similar to a bank, with high rates. It’s recommended that you use a lawyer when dealing with small business lenders because they can help dissect complex contractual readings. Small business lenders do not hold your hand through the process, as an SBA loan may.
Businesses can potentially receive trade credit from suppliers by negotiating later payment options. Trade credit is more useful in scenarios such as a retail startup needing inventory before opening. In such a case, the startup can ask to extend the payment terms to 90 days, likely for a fee. It might be worth it when you consider the vital nature of a smooth-running opening.
There is an abundance of funding options for small businesses, both in equity and debt funding. Small businesses should be mindful of their budget and projections when choosing which funding avenue to pursue. Regardless of the method, it’s equally important to show preparedness, confidence and passion when pitching your business to investors. A great idea, passion and knowledge of funding methods can elevate a small business substantially.