Learning how to get financing for a business is central to success. Without capital, an entrepreneur can’t start or sustain their business operations.
Here you’ll find the best financing methods, suggestions, and answers to the most-asked questions about how funding works.
What Small Business Financing is and Why Do You Need It
Business financing is one of many ways to help your business succeed. You can choose from various options to get funds for your business.
In 2019, the Small Business Administration reported that “21.5% of startups fail in the first year, 30% in the second year, 50% in the fifth year, and 70% in their 10th year.”
One of the reasons listed for failure is that business owners run out of money.
With capital, you can pay for day-to-day business expenses, get through temporary cash flow interruptions, increase your inventory, or make investments to help you grow.
Having access to sufficient finances keeps your business on track and contributes to long-term survival in your industry.
You can carry out strategies, make critical decisions, and complete business objectives on time with adequate finances.
Below you’ll find some sources of finance for small businesses that you can use to improve your operations.
How to Determine How Much Money You Will Need
You need to precisely estimate the required funding to start a business, including supplies, rent, marketing, utilities, licenses, insurance, legal fees, and other specific expenses related to their industry.
Some expenses will be one-time expenditures, while others are ongoing month-to-month disbursements.
Once you have a close estimate, multiply that amount by six (a cash cushion of six months of operating expenses to sustain your business).
That’s an approximate amount of money a startup business needs.
To allow for unexpected expenses, increase that amount by 20%.
Of course, an established business can review financial statements, including a balance sheet and income and cash flow statements, to determine the actual costs to operate their business.
Another consideration when determining how much money you need is to prioritize spending.
Every investment you make should strengthen your business to grow, survive, and make money.
You do that by following an investment strategy that matches your business plan and expenses.
Your overall objective is to use money in the best way to get the highest return on investment.
Technology, talented employees or freelancers, new market opportunities, and competitive advertising and marketing are proven sectors that can maximize business growth.
However, you may need to devote capital to research and development (R&D) to make the best investments for your business industry.
How to Fund a Business Start-up
Thankfully, you have more than one or two financing options business, whether starting or growing an existing one.
Below find traditional bank loans options and other alternatives to get funds.
Get a business credit card that offers a 0% introductory so you can make business purchases without paying interest.
However, don’t forget to plan to pay off the balance before the introductory period ends.
These types of business funding are very popular because of how easy they can be to get.
Does a Business Loan Affect Personal Credit?
A bank loan is often seen as a more attractive option than other types of financing.
First, banks typically offer lower interest rates than other lenders. This can save you money in the long run and make it easier to afford your monthly payments.
Additionally, banks usually have more flexible repayment terms than other types of lenders, for example, when talking about a small business loan. This means that you can choose a repayment schedule that works best for your situation.
Banks are typically more willing to work with borrowers who have less-than-perfect credit than other types of lenders.
This makes them a good option for those who may not qualify for traditional financing.
Microloans and SBA Loans Program
The Small Business Administration offers loans up to $50,000, with micro-loans averaging $13,000.
You can use proceeds to “rebuild, re-open, repair, enhance, or improve your small business.”
Convenience is one of the hallmarks of alternative lending.
The alternative requirements lenders offer aren’t as strict as traditional lenders, and the loan process from beginning to end usually takes just a couple of days.
In many cases, alternative lenders offer the best financing options for a business because of how friendly their requirements are.
Angel Investor Or Venture Capital Firms
If your business already has a good cash flow, consider partnering with venture capitalists to receive instant equity without paying a loan.
In return for investing capital and their expertise, these investors want a percentage of the business’s worth or corporation shares.
Large groups of people invest in your own business by providing capital.
There are four major types of crowdfunding for small businesses:
- Rewards (backers receive a discount, product, or service in exchange for the contribution)
- Debt (backers repaid with interest)
- Equity (backers receive business shares)
Funding is available from traditional financial institutions such as banks, also in credit unions, and online lenders.
A business loan amounts vary based on the borrower’s creditworthiness.
Each lender charges specific interest rates and fees and has different loan terms.
Lines of credit
These funding options business usually are unsecured (no collateral required) and provide predetermined amounts of money a business owner can draw from and repay.
Interest begins as soon as you withdraw funds, and the line of credit balance replenishes each time you make payment.
You sell a percentage or all of your accounts receivable invoices to a factoring company.
They, in turn, pay you 80% to 90% of the total invoice value.
Once they collect payment from your customers, they pay the business the invoice balances less their fees.
Peer to peer lending
Without going through a financial institution, you can obtain a loan from an individual.
P2P websites connect borrowers with lenders and set the rates and terms.
As is true with most funding for small businesses, borrowers with the best credit get the best rates and terms.
Other Methods of Funding a Business
As small business owners consider these non-traditional alternative sources of capital
Friends and family
Personal loans from family and friends work out as long as everyone is on the same page. So treat this as you would any loan.
Get all details of the loan in writing as a formal loan agreement specifying each party’s terms.
Also, make timely payments even though this type of financing won’t build your credit history.
Some friends and family members won’t charge interest, but some will when asking for funding for small business startups.
Be cautious when withdrawing funds from a retirement account, as it may have tax consequences that reduce its value as a viable funding option.
Ask your financial advisor how to use a 401 (k) as a rollover for business startups (ROBS) to avoid paying penalties, taxes, or interest charges.
Savings are some of the most common sources of finance for small businesses but not necessarily the best ones.
If you dip into your personal savings account, don’t withdraw every penny to finance a business. Keep a 3 to a 6-month cushion of money to cover personal living expenses.
If you already have a part-time job, keep it to save the much-needed funds for small businesses. If you don’t have one, get one, so you have extra money to finance and stain your business as you start earning revenue.
You invest your own money into your business and absorb all the risk. That means you have more control over your business but increase its financial strain.
A business owner launches a presale campaign to take orders for their product or service. This provides funds to manufacture the product/service while building a customer base.
This is a good option for business owners with excellent marketing skills.
The downside is that you must deliver your product/service on your release date.
Government programs and grants
Federal, state, and regional grants are available through various organizations. Grants are similar to loans in that you receive a lump sum. The difference is that you don’t have to pay them back.
How to Find Funding to Start a Business
The best way to find funding is to check out the types of financing we’ve mentioned and see which ones will work for your business. Know beforehand how much you can safely repay without causing undue stress on your business finances.
If you’re just starting out and have little to no money, it’s better to avoid taking on a lot of debt.
Instead, take out a small microloan, get a business credit card and repay the balance each month, or keep your day job and save money.
You could have a business idea that wows an angel investor or a family member or friend willing to invest in your business because they believe you have what it takes to succeed.
Make sure to check out available grants and crowdfunding platforms geared toward helping business owners launch a business.
Is It Difficult for Small Businesses to Get Loans From Traditional Lenders?
Getting funds from banks and other traditional lenders isn’t always easy.
These financial institutions don’t take unnecessary risks. They don’t look favorably on anyone with cash flow problems, poor credit, or not having collateral to secure startup funding.
These lenders look closely at a business owner’s debt-to-income ratio to determine if an applicant can take on more debt and avoid businesses deemed a high risk based on the government’s Standard Industrial Classification (SIC) codes.
For those reasons and others, traditional lenders have stricter lending requirements so that many small businesses do not qualify for funding.
Plus, their lending processes are usually very long and can take several weeks or months if the amount is too large.
Traditional banks can offer lower rates and extended terms.
If you have a less-than-stellar credit history or need funds quickly, traditional lenders probably won’t be the best fit for your needs.
What Is Alternative Financing?
The majority of alternative lenders offer their financial products on online financial marketplaces.
These non-banking lenders provide funding to individuals and groups that can’t get credit through traditional financial means.
Some examples of alternative financing are online lenders, invoice trading, and consumer lending.
The Benefits of Alternative Lending
- Alternative lenders can provide startup capital quickly.
- Their fees usually are straightforward, and most do not charge a prepayment penalty when paying off small business loans early.
- Application requirements aren’t as strict as traditional banks.
- The loan process is convenient and typically completed exclusively online.
- In most cases, taking out a loan with an alternative lender allows you to build credit.
- Alternative lenders provide funding in a few days at faster repayment terms and sometimes higher interest rates.
Why Small Businesses Should Seek Alternative Financing
It may be possible you can’t qualify for a traditional loan because you haven’t been in business very long or not at all.
But alternative lenders work with business owners just starting or ones in business less than a year.
Their more moderate requirements increase a small business owner’s chance of being approved for funding for small businesses. Funding can occur in minutes, days, or within a week.
Compare Alternative Lending Options
- Community Development Financial Institutions: This type of lender works with lower-income applicants and first-time business owners to offer affordable lending options. Loans are available in amounts up to $250,000 at competitive rates.
Camino Financial is the first-ever neo-CDFI in the country.
- Regional or community banks: Applicants who value a community and personal experience can apply at community and regional banks. These lenders usually have various financial products and services from which to choose.
- Credit Unions: If you’re a member, you can apply for small business financing, and these financial institutions normally offer lower rates to their members.
- Online Lenders: This is one of the quickest ways to obtain cash for your business. Applicants can choose from a range of financial products and amounts that fit their business needs. In addition, many reputable online lenders offer pre-qualification terms that won’t affect the applicant’s credit.
Types of Business Funding, what can you finance with a lender?
Typically, entrepreneurs use loan proceeds for these types of expenditures with the end goal of increasing revenue and profit.
- Consolidate debt
- Purchase inventory
- Buy equipment
- Expand a business
- Pay for startup costs
- Pay for day-to-day expenses
- Hire employees
- Improve cash flow
- Make building renovations
- Purchase a business
- Start a franchise
- Take advantage of vendor discounts
- Invest in marketing and research
- Use funding for technology
- Build a website
- Open a new location
- Add a new product line or service
How Small Businesses Can Apply for Alternative Lending Options?
Before filling out an application, compare lender requirements to include the interest rate, credit score, annual revenue, repayment terms, etc.
Choose a lender that offers more advantages for your business than disadvantages.
Then, complete the application making sure to carefully and thoroughly answer each question.
Examples of information they may need include copies of tax returns, a photo ID, a copy of your business license, and financial statements.
Before you submit the application, ensure the lender uses a secure system (like Plaid) to upload copies of sensitive financial information.
After applying, some lenders let you know immediately if you prequalify. Then, a loan specialist should contact you to answer your questions and suggest the best loan product for your business.
Once approved, you should receive a small business financing agreement detailing the loan’s terms. After you agree to the terms, the lender should distribute the proceeds within a couple of days.
At Camino Financial, we can fund your loan in just 2 days!
How to Get Financing for a Business—Choose a Financing Option
P.T. Barnum, an American millionaire, and businessman understood how money works in a business environment when he said, “Money is a terrible master, but an excellent servant.” In other words, you can decide how to use the money to your best advantage.
With money in your hand, you can move your business forward.
As you just read, there are many ways to get cash for your business. But some financing options are better than others.
For example, at Camino Financial, we empower small businesses by offering funds for small business startups.
We can help you get the funds you need.
Apply for a startup business loan today. You’ll be pleasantly surprised and pleased with our lenient requirements and quick access to financing. After all, our motto “No Business Left Behind” is what motivates us to reach business owners others overlook.
FAQs on How to Get Financing for a Business
What type of financing is best for a small business?
Low-cost financing presents the least risk to the borrower.
Small businesses should choose financing that offers the best rates, terms, and repayment periods without adding more stress to the business’s cash flow.
How do you finance a new business?
You look at the available options and choose one or more that can grow your business with the least risk.
How can I finance a business with no money?
Save at least 6 months’ worth of business expenses. Get a microloan you can safely repay. Check out what small business grants are available in your community. Talk to angel investors willing to invest in your business idea.
What are the primary ways to finance your business?
For getting investment funding, you can go into debt by borrowing money, getting investors interested in partnering with your business or using a combination of financing where you incur debt and increase equity.
How to get financing for a small business?
Review the types of financing options that are the most suitable for your business’s financial health and growth. They should be ones that you qualify for because you can meet specific requirements to be approved.
How to get investors for your business?
When seeking a venture capital fund, have your financial information ready, like a business plan, financial statements, and a prepared presentation so you can answer questions.
At the same time, find out as much as you can about a potential investor before you consider partnering with them. Network with other business owners already using investors to select the best one for your business.
What are the 3 types of financing in a small business?
Debt financing (a loan you repay), equity financing (financial partners invest in your business—you don’t repay them), and a combination of the first two types of financing (an option for growing companies and investors looking to see a 20% to 30% return).