Whether you’re planning to open a small business in your local neighborhood or you’re looking to launch an industry-changing tech start-up, one of the first problems you’ll need to tackle is how to fund your new venture. Check out the following 5 methods for funding a new business to learn more about the options available to today’s entrepreneur and find the right funding source for your business.
1. Traditional Bank Loans
Local and National banks offer a variety of financial tools for small business, including business credit cards, equipment loans, and traditional term loans. Traditional banks offer competitive interest rates on their Term loans that fluctuate with the economy but generally stay between 4%-10%. While national banks only approve about ¼ of total applications, local banks are much more likely to approve your loan application and currently approve approximately ½ of all applications they receive. A traditional bank loan might be the right choice for you if you need fast approval for a large sum in order to purchase equipment or other one-time expenses that are necessary to get started or expand your business. If you are starting a new business and can meet a few additional requirements, you might want to look into our next method funding before opting for a traditional bank loan.
2. Small Business Administration Loan
The Small Business Administration(SBA) offers business owners that meet specific criteria access to a curated list of lenders who will provide you with a guaranteed source of funding, access to support and educational opportunities, and more flexible down payment and repayment options than traditional loans. To qualify for an SBA loan, your company must not exceed a specific number of employees, be legally registered as a for-profit business, operate in the United States, and the owner(s) of the business must have made personal investments into the business. If you’re looking to expand your small business and meet the criteria above, an SBA loan will give you excellent repayment terms and additional resources when compared to a traditional bank loan. If you haven’t made a significant investment in your business yet and don’t qualify for an SBA loan, consider this next funding option.
3. Friends and Family Fundraising
Many start-ups begin with a round of fundraising known as a “Friends and Family” round. How much you raise will depend largely on the stage of development that your business has reached and the personal funds available to your friends and family. If your friends and family have capital to spare and think your idea has merit, you may not need to develop your business as thoroughly as you might if your friends and family need to be more cautious with their available funds. To determine if this is the right source of funding for your business, try to determine how much capital you’ll need to raise in order to achieve your current business goals. If you think your friends and family may collectively have the amount you need, next think about the risks and rewards that would come with an investment in your venture. What kind of return on their investment will your friends and family see? Will you pay them back with interest or give them equity in your business? How likely is your business to succeed or fail? If you need a large sum to achieve your goals but there is also a high likelihood of failure, you may want to consider the next option.
4. Angel Investors
An Angel investor is an individual who often uses his or her own financial resources to fund early stage start-ups in need of capital for growth. Unlike a traditional bank loan, Angel investors are far more interested in the business owner than the viability of the business and will frequently provide a considerable amount of mentorship to help the owner succeed, even if the original business idea changes. Another significant difference between Angel Investors and traditional bank loans is the type of return on investment these lenders are looking for. A traditional bank will lend you money with the intention of making a profit on the interest you pay on the money you borrow. Meanwhile, an Angel investor is usually looking to trade capital for equity and hopes to make a profit when your business is sold or goes public. An angel investor might be the right source of funding if you have a risky but highly lucrative business, would benefit from mentorship, and are willing to trade a significant portion of your equity stake in exchange for the funds you need. If you are looking to fund your business without trading equity, the last option might be just what you’re looking for.
Rather than raise funds from a single Angel investor or a small group of family and friends, you might consider asking for a small amount from a large group of strangers. Crowdfunding platforms like Kickstarter allow you to showcase your business idea online to millions of people who might be interested in the product or service you would like to offer. Through these online platforms, thousands of people can each invest small amounts that eventually add up to the sum you need in order to get your business started or reach that next stage of growth. In exchange for this type of funding, your investors will usually want early access to your service or heavy discounts on your product when it comes out. For example, let’s say you want to create a new type of running shoe and decide to raise funds for it on Kickstarter. You would create a profile, pitch your idea, and offer your new shoe to investors a few months before anyone else will have access and at a 50% discount in exchange for a $50 investment in your company. If you have a well developed business plan and a working prototype of your product or service, crowdfunding can be an excellent source of funding. If you haven’t developed anything that you can easily share with others, getting funding online can be more challenging. With hundreds of business ideas to choose from, crowdfunding platforms can be highly competitive and you’ll need to have an idea that stands out to raise a significant sum.
If you still aren’t sure which of these methods may best suit your needs, you can start by exploring each option individually to see the specific offers available for your venture. For example: if you think a SBA Loan or traditional bank loan might be right for you, check out a few of the rates and offers available through the SBA, a national bank, or your local financial institution and see if the terms and conditions meet your needs. Then, once you have a more concrete understanding of what’s available to you through these traditional lending platforms, you can more accurately compare these offers to the non-traditional resources we’ve discussed here.
1. https://www.fundera.com/business-loans/guides/best-banks-for-business-loans 2. https://www.sba.gov/funding-programs/loans 3. https://www.entrepreneur.com/article/246404 4. https://www.entrepreneur.com/article/228103 5. https://www.investopedia.com/terms/a/angelinvestor.asp 6. https://www.entrepreneur.com/article/228125