One of the most cliched statements in starting a small business is that “it takes money to make money”… but it is often true. Many businesses need an infusion of cash to buy essential components of their operations. For a pizzeria, that could be an industrial oven, and for a yard care business, that could be a commercial lawn mower.
A common funding practice many new business owners take is to use personal savings and start small by reinvesting profits into the business. This approach, known as bootstrapping, seems rooted in common sense, but can be restrictive to your business’ growth and personal finances. If your business needs a large infusion of capital, you don’t necessarily have to go it alone and shouldn’t if it jeopardizes your financial security.
There are a number of funding sources available to new and established businesses beyond your personal savings. Here are the five most common.
1. Banks and Credit Unions
As with your house and car, you can also seek funding for your business through loans from banks and credit unions. The positive aspect of going through banks for funding is that it gives you the ability to access large amounts of funds and build your business credit. A challenge is that the process can be lengthy and difficult as most lenders will want to see a detailed business plan and may expect a personal guarantee or collateral.
2. Small Business Administration-Guaranteed Loans
Another challenge with banks is that they are often wary of lending to new businesses. Fortunately, the Small Business Administration (SBA) works with lenders to guarantee loans for aspiring entrepreneurs to increase access to capital by reducing the risk involved for the lender. They also have lower interest rates, but the approval time can be lengthy.
3. Mission-driven Lenders
If you are unable to obtain a traditional bank or SBA-guaranteed loan, another option is a mission-driven lender. These types of lenders include community development financial institutions (CDFIs) and work with entrepreneurs by providing hands-on guidance from the initial application through the life of the loan. While the loan sizes tend to be smaller than those from banks, many entrepreneurs find the mentorship provided by mission-driven lenders to be invaluable.
4. Online Lenders
Another option that has increased significantly in recent years is online lending. They come in a couple of different forms. One is private companies, such as Square and PayPal, that lend as either part of their larger offering or as businesses wholly designed for online lending. In addition, most financial institutions, including traditional banks, SBA-backed lenders, and CDFIs, offer online lending options. In either case, the application process and approval times are often faster and more convenient. However, many non-bank online lenders charge higher interest rates or high penalties and fees so be sure to educate yourself on the repayment terms before taking on any loans.
Another funding source you may have seen filmmakers use to get their projects greenlit is crowdfunding, and it can potentially work for your business too. Crowdfunding involves asking a large number of people to fund your business, typically through small donations, and they receive a small gift like branded merchandise rather than financial return. Most crowdfunding platforms are low risk because they don’t require business owners to repay the money to the donors. The one downside is that a crowdfunding campaign is also time-intensive to put together so it is important to make sure it is a good fit for your business.
Whether you use personal savings or a crowdfunding campaign, there are many funding options for your business. The most important factor in choosing one is determining which is the best for your financial security, business’ growth, and mental health.