Finding the right financing to make sure your business is well-funded is one of the most important steps before you launch or expand. Learn about the four primary types of small business financing options out there and which is the right one for your business
It takes capital to start and run a business. Most entrepreneurs need capital to either launch their startup or grow their business with big purchases like a larger facility or equipment.
There are several ways to get the cash you need to grow your business. The first step is to determine which type of funding is right for you.
Small Business Owners Have Multiple Financing Options
There are four primary types of funding a small business owner can consider.
• Small Business Loans
• Venture Capital
An important first step before determining which type of funding is right for your business is knowing the amount of capital you’ll need. Each type of funding has its pros and cons depending on the amount you need, your level of risk adversity, your willingness to relinquish equity versus pay interest, and the amount of capital you already have on hand. If you’re one member of a partnership of owners, the dynamic of how your business is set up will need to play a part in your decision as well.
Here’s a deeper dive into each of these financing options to help you make the right decision for your business.
Small Business Loans
If you want to infuse capital into your business without dipping into your savings or giving up equity, then a small businessloan is the place to start. This type of financing is also known as debt financing. The most common way to receive a loan is by going to a traditional bank. Most have various types of loans for businesses and will lend money with payback terms and interest owed.
If you apply for a small business loan with a bank, most will require you to present a business plan, expense sheet, and a financial projection for the next five years. Be prepared to make your case for why your business is a worthwhile investment. Also, be sure to shop around with more than one bank to find the best rate and terms.
SCORE has a number of business planning resources to get you started in writing your plan. Visit the SCORE Business Planning & Financial Statements Template Gallery to get started.
If you experience challenges securing a traditional business loan, the U.S. Small Business Administration can support you with an SBA-guaranteed loan, giving a bank more confidence when lending to your business.
Capital investors trade funding for equity in your business with the expectation of a return. Typically, they also want some level of involvement in your company as further assurance that the business is being managed in a way that’s going to ensure they see a worthwhile return on their investment.
If you’re willing to give up equity in exchange for capital, as well as some of the control in how you run your business, then borrowing from a venture capitalist can be a great way to get the cash you need. Venture capitalists tend to have a higher threshold for risk than a traditional bank. So, if a bank denies your loan application, you may have luck with a venture capitalist who’s more willing to invest.
Like banks, venture capitalists will also expect to see a business plan with expenses and projections.
Depending on the amount of funding you need and the amount of cash you and your partners are willing to contribute upfront, self-funding may be your best financing option.
When you fund your business yourself, you maintain complete control. There’s no bank or investor taking a cut of your profits or influencing how you decide to run your business.
While self-funding allows you to reap all of the rewards of your business’ success, it also means you assume all of the risks. One of the biggest reasons small businesses fail is that they’re underfunded, meaning they simply run out of cash. If you’re self-funding your start-up, you need to make sure you have enough cash before you start, plus a reserve.
Learn more about the importance of cash, cash flow and funding for your small business by reading the SCORE article, “The #1 Reason Small Businesses Fail – And How to Avoid It.”
Instead of receiving money from a single investor, crowdfunding is a way of securing funding through hundreds, potentially thousands, of individuals interested in supporting your business.
Crowdfunders contribute to your business and, in return, ask for a special offer. Other crowdfunders contribute simply because the company supports a cause they believe in. Whatever the reason, crowdfunding can be a great source of cash because it doesn’t involve taking on an investor who’s looking for equity. Crowdfunding contributions are also not a loan, so there’s no interest to pay.
Understand Your Financing Options So You Secure the Right Type of Financing and the Cash You Need
Having enough capital to start and operate your business is step number one before you launch or expand your business. Owners need to take the time to understand all of their financing options and determine exactly how much capital is needed now and in the future.
Luckily, business planning is one of the many things that SCORE mentors do best. By working with a SCORE mentor, you’ll have an experienced partner by your side to walk you through the entire business planning process. They can work with you to develop realistic financial projections and determine the amount of capital you need to sustain your business and find success. Contact a SCORE mentor today.
Southwest Regional Vice President, SCORE
Since 1964, SCORE “Mentors to America’s Small Business” has helped more than 11 million aspiring entrepreneurs and small business owners through mentoring and business workshops. More than 10,000 volunteer business mentors in over 250 chapters serve their communities through entrepreneur education dedicated to the formation, growth and success of small businesses. For more information about starting or operating a small business, call 1-800-634-0245 for the SCORE chapter nearest you. Visit
SCORE at www.score.org.
Funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions, and/orrecommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA