Not every entrepreneur can afford business startup expenses out of pocket, that’s why there are several financial options at your disposal.
The 2019 Federal Reserve’s Small Business Credit Survey found that 43% of small businesses submitted a loan application that year. The need for financing is common for small businesses, even beyond the startup stage.
Small business loans are one of the ways many small businesses cover startup and expansion expenses. But working capital expenses and those resulting from small emergencies are often sought after as well.
Beyond loans, there are also local grants and other possible ways your business may qualify for aid.
In this article, we will go over:
The most common method for financing a business is simply taking a business loan.
Most business loans are provided by banks.
Banks offer small business loans to most businesses run by individuals with workable credit. But business credit comes with other requirements, as both the business credit score and personal credit score of the owner are considered.
The other traditional lending option, credit unions, may provide you with better rates if you qualify for one.
Alternative lenders, primarily small businesses operating online, also provide business loans. They typically offer faster service and have fewer requirements.
However, alternative lenders typically charge higher APRs (including interest and assorted fees) and may not be as transparent. That means you can expect a lower standard of customer service and higher rates, in exchange for easier and faster access to funds.
Sometimes, but not necessarily.
There are several sources of business financing available to entrepreneurs. Broadly speaking, you can break them down into four categories.
There are a few ways to finance a young business:
We’ve already covered business loans.
Venture capitalists are investors that are always looking for great returns. They seek out businesses, including small, young businesses, with the potential for great returns.
If your business has already demonstrated high growth potential, venture capital may be available to you. In some ways, venture capitalists are more willing to take on risks than traditional lenders.
“Angel investors” are similar, but the term refers to wealthy individuals who invest their own money into startups. Venture capitalists are institutional investors who use risk capital provided by others to invest in businesses.
Investments often come in similar amounts as business loans. The typical venture capitalist is looking for an investment that is:
This essentially boils down to grants.
There is a massive collection of business grants provided throughout the US. These include a wide variety of grants from state governments and some localities.
The federal government provides some grants to businesses engaged in well-defined, specific activities. For example, the Small Business Administration’s Research and Development Grant is for small businesses engaged in “scientific research and development” (read more).
Grants.gov is the most comprehensive government resource on the topic.
Of course, this one can be difficult.
The capital required to start a business is much higher than for other expenses, including buying a new house. However, aggressive saving is one long but tested path to starting a business later in life.
Of the personal loans that can potentially make the process easier, a home equity line of credit (HELOC) is arguably the most appropriate. That’s because, while they do collateralize your home, they provide access to much larger sums of money than other loans.
They also carry some of the lowest interest rates you can find on any kind of loan. In general, a HELOC can often cost less than a commercial bank loan.
Crowdfunding is a newer option but has created several incredible success stories. Oculus, the VR headset company, was one of them. They started with $2.4 million raised through crowdfunding. Following this humbling startup success, the company was sold to Facebook in 2014 for $2 billion.
There are a few key things to consider when looking for a business loan.
Your qualifications as a borrower determine the flexibility and availability you can expect with all of the factors below.
The most important qualifications for you as a borrower are:
There are some loans meant for young businesses or startups. But if you lack at least a year in business and have a very small revenue, you may face higher interest rates.
Providing collateral may be a necessity. Where it isn’t, it may reduce your APR to provide it, but that of course risks your collateralized assets.
The length of your loan affects your monthly payments directly. In general, a longer term means lower monthly payments, but more money paid through the life of the loan.
Depending on the type of lender you go to, you may face sneaky fees such as origination fees and early repayment fees. Make sure you ask your lender about their entire fee schedule. You don’t want to be caught by surprise and owe them more than you thought you would.
There are several financial options available when savings and personal assets can’t cover your expenses.
Most business owners must resort to loans, but there are also grants and investors that may be able to help. Crowdfunding is another option.
When looking for business financing, it’s important to remember that all financing comes at a cost. Look closely at the rates, terms, and fees of any business financial options.