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Financing Options for Small Businesses

  • A list of lending options and alternatives other than banks
  • For those starting or expanding a business
  • Help decide which financing alternatives fit your startup

If you need some financial assistance getting your business off the ground, you’ll have plenty of options available to you. While banks and credit unions offer a traditional path for business loans, you can also pursue resources through investors, crowdfunding, or other means.

Personal funds

Entrepreneurs are typically confident enough in their business idea that they’re willing to invest some personal assets in the venture. For example, you could dip into a savings account, tap a retirement fund, or draw cash from a liquid asset like a stock portfolio.

Naturally, you’ll want to be careful about where you get your funds and how much you take. The U.S. Small Business Administration recommends that you never put money money into your business than you can afford to lose. Be aware of any negative ramifications from drawing on a fund; for example, tapping a retirement account early can hamper its appreciation and result in penalties for early withdrawal.

Credit cards can be a useful way to cover major expenses necessary to start a business, but you should be cautious about this method. If you rack up too much debt, it can harm you credit score and lower your chances of getting approved for financing through other means.

Friends, family, and acquaintances

Friends and family members will often have enough confidence in your ability to help you invest in a business idea. Don’t be afraid of casting a wider net as well, making your pitch to co-workers or any other acquaintances who may be interested in your proposal

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Be prepared to present a business plan and other information, just as you would when applying for traditional financing. Friends and family will still want to make sure they’re making a sound investment, and you can easily jeopardize personal relationships if they think you have squandered their funds.

Consider asking one or more people to come onto the venture as partners. In addition to investing their funds, they’ll also be able to take a more active role in the company.

Banks and credit unions

Banks and credit unions are one of the most traditional ways of getting financing for a business. You’ll need to present a business plan as well as a variety of other financial information for the lender to use in deciding whether or not to approve a loan.

In addition to term loans, lenders may offer specialized products that can assist with certain business needs. For example, a business line of credit provides a flexible way to borrow funds up to a certain cap.

Compare the terms offered by different lenders to see which option will be most advantageous to you. You may have more luck with local lenders, who may be more willing to support initiatives that will assist the economic development in the communities they serve.

Alternate lenders

Online lenders have been growing in popularity, and often provide a quick turnaround that lets you acquire necessary cash right away. Peer-to-peer lenders help connect entrepreneurs with investors, but usually charge higher rates.

Community development financial institutions are growing in popularity as a way to provide financing for small businesses in low-income areas. CDFIs aim to provide affordable lending to support economic development and neighborhood revitalization efforts.

SBA loans and programs

The U.S. Small Business Administration oversees a variety of financing options for small businesses. SBA loan programs are designed to be affordable, and some offer additional assistance such as counseling and education.

The SBA also oversees the Small Business Investment Company program, a network of SBA-licensed investment companies. The Small Business Innovation Research and Small Business Technology Transfer programs offer funding opportunities for companies that have the potential to participate in federal research and development programs.

Angel investors and venture capitalists

Angel investors and venture capitalists will provide funds to companies they believe will provide a return on investment. In exchange for the capital, they’ll receive an equity share in the company that can be cashed out later on, typically through an initial public offering or a merger and acquisition.

These investors usually concentrate on specific fields with a high potential for growth, such as technology or life sciences. They also typically ask for some say in how the business is run, such as a seat on the board of directors.

Crowdfunding

Crowdfunding invites anyone interested in your business idea to chip in some money to make it a reality. Crowdfunding platforms are usually set up so that donors who contribute a certain amount are rewarded with a free product, an equity share, or other perks.

Crowdfunding is usually a low-risk endeavor, as donors are under no obligation to pay and you are under no obligation to provide the perks unless the funding goal is met. However, you’ll want to review the platform’s terms to make sure you won’t be surprised.

Grants

A wide variety of small business grants are available through sources such as for-profit and nonprofit organizations, government agencies, and corporations. While grants don’t need to be repaid, they usually come with stipulations that the funds must only be spent on certain expenses.

These programs can be a useful source of money, but shouldn’t be your sole source of funding. Grants are often highly competitive, and may have certain limits that prevent you from applying.

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