You’ve got a great idea for a business that you want to start, but have
no collateral and not enough money in your savings account. Are you out of luck? Not necessarily.
Where do you go to
find funding for a new business? Learn all about small business funding options in this helpful tutorial.
How to Get Funding For a Business (Example)
Let’s start with an example. Here’s what one entrepreneur did to get funding.
Vladimir Gendelman,
Founder and CEO of Company Folders, used no-interest rate cash advances from
multiple credit cards to raise $50,000 to fund his business because he couldn’t borrow money from banks.
He adds, “When
the promotional period for the credit card ended, I would transfer the balance
to another card so I can pay the debt without incurring interest.”
While it’s a creative way to raise funds, it’s not for
everyone. Not all business models have a healthy cash flow that’ll allow you
to pay debts regularly on a monthly basis (as in the case of businesses with 30
to 60-day net payment terms).
Although some banks are more lenient now compared to how
they were during the 2018 Great Depression, more businesses are seeking
alternative funding methods knowing they might have a harder time getting
approved for a traditional loan.
What Is Business Funding? Debt vs Equity Funding for New Businesses
You can get capital funds for your new business in a variety
of ways, including money from:
- friends
- your savings
- lenders
- investors
Wherever the money comes from, it’ll fall into one of the two main types business
funding: debt or equity. But what do those terms mean?
- Debt is money borrowed that’ll be paid at a pre-determined
schedule at an agreed interest rate. - Equity is money given in exchange
for ownership of your new business.
Unlike getting a loan, taking on equity isn’t a one-time transaction
because the money you take includes a long-term working relationship with
investors who’ve got a vested interest in the success of your business. That
means you can’t make business decisions on your own, as your investors will
want to weigh in on how you run things. If you’re not ready for that, you’re better
off with loans.
These articles can help you learn more about equity financing:
FinanceHow to Raise Money From Venture CapitalistsAndrew Blackman
FinanceThe Pros and Cons of Having Private Equity Firms Invest In Your BusinessAndrew Blackman
Alternative Small Business Funding Options
If you’ve been declined by banks or clueless how to get
funding for a business, the options below should give you a broader idea of the
alternative funding options available:
1. Peer to Peer (P2P) Lending
A 2017 poll from SmallBizTrends
show that 13% of respondents prefer online loan marketplaces, while last year’s
data from American Bankers Association shows that the majority of banks are interested
in partnering with a third-party digital platform to enter the digital small
business lending market. Digital platforms are still not as mainstream as traditional loans, but they’re gaining momentum.
Jimi Shabir,
Managing Director at Bootcamp Media likes P2P lending because:
“P2P
platforms like Funding Circle helps small businesses to quickly raise money to
meet short-term goals such as working capital for your new company’s first
project.”
P2P platforms work like banks, except in this case the money
you’re going to borrow will come from different individual investors. They
don’t require collateral and the documentary requirements aren’t as strict as
bank loans.
But that doesn’t mean they’ll loan money to just about
anyone. After all, they also need to protect their investors, so expect some
platforms to require a certain credit score or sales volume.
Here’s a list of some P2P lending
options:
Unlike banks, however, the decision to approve your loan
isn’t made by one person. Instead, it’s up to the individual investors of the
P2P platform to decide whether they’ll fund your loan or not. The good news is the
application can take as little as 10 minutes, and most platforms will post your
loan request within 24 hours.
2. Government Grants
Governments usually allocate funds for the creation of new
businesses, especially those targeting worthy causes such as education,
medicine, technology, and social needs.
The requirements to apply for a grant vary, as these are
given by different government agencies that in turn have their own goals and
requirements.
While grants aren’t typical equity investments, the
government agencies that distribute these funds will require you to report on
your progress. They’ll monitor your results because they either have to show
proof that the funds were given to a legitimate business and weren’t corrupted,
or they’ve got a plan to use your idea (which is typical for military, medical,
and educational grants).
Here are some examples of where to find government grants:
- Grants.gov
- SBIR America’s Seed Fund
- British Small Business Grants
- The European Regional Development Fund
3. Angel Investors
Angel investors are like Venture Capitalists (VC) who invest
money in exchange for a share of your company’s ownership. Angels are often
wealthy individuals who’ve got successful businesses of their own. They’re looking for new business ideas that have potential so they can help them grow and
earn a profit in return for their investment.
Unlike VCs though, an angel investor could
get more hands-on because they’re risking their own money. Angel
Resource Institute’s 2016 report also shows that they prefer businesses in
the Healthcare, Software, and B2B industries.
You can find angel investors at Angel Capital
Association or Angels Den.
4. Micro-financing
Micro loans are small, short-term loans with a low interest
rate. They’re often used by self-employed business owners and new startups
with minimal capital requirements. The loanable amount varies per organization,
but it usually ranges from $500 to $50,000.
Requirements vary per lending organization, but this is one of
the most lenient options for aspiring entrepreneurs who need start-up capital
and have no revenue history. Some organizations also prioritize loan
applications from women and minority groups.
Below are some of the micro lenders operating in the U.S.:
-
Grameen America. Provides
microloans of $2000 to a group of four women after they complete one-week of financial training. - Valley Economic Development Corporation. Loans $500-$2500 for six to 24 months with an interest rate of $8.5%.
-
Justine Petersen, A non-profit that provides a microloan of $10,000 as an
intermediary of the U.S. Small Business Administration.
Other Micro-Lenders:
Check out this guide if you’re interested in other business
startup capital loan options:
5. Crowdfunding
Crowdfunding platforms allow you to raise funds from
individual contributors (a.k.a. “backers”) who love your business idea. It’s a
great option for entrepreneurs who’ve got a creative product, but have no funds to
manufacture it yet. It also works for those who want input on a prototype they
designed, since backers often give design suggestions when your campaign is
actively raising funds.
This funding source can’t be directly classified as debt or
equity, since backers give funds in exchange for early-access to your products,
or what crowdfunding platforms call “rewards.”
While there are no credit checks or sales volume
requirements for crowdfunding, it requires a fair bit of creativity and
marketing know-how to launch a successful crowdfunding campaign.
A typical
crowdfunding campaign includes:
- videos and images of the product or business idea
- a story about you and your company
- product description and technical specifications
- production timeline
Here’s a list of crowdfunding platforms:
6. Payment Portals and E-Commerce Platforms
Do you think your business won’t qualify for a government
grant or P2P loan? If you’re using payment platforms like PayPal or Square you might still be eligible for a loan.
Here are the current terms for a PayPal Working Capital loan:
- Loanable amount. up to 35% of your annual sales, but not more than $125,000 for your first loan
- Requirements. Business or Premier account that’s at least three-months old
-
Sales volume. $20,000 and $15,000 in annual sales for Premier accounts and Business accounts
respectively -
Payment terms. loan repayments are deducted from every sale processed, but you need to pay 5%
to 10% of your total loan every 90 days. - Credit check. no
-
Application time. five minutes
Here are the current terms for a Square Business loan:
Square doesn’t have an application process per se, because
they only offer business loans to customers they deem eligible. Because of
this, there’s not much info on their website about the loan requirements but
below are some information from Merchant
Maverick, a marketplace for credit card processing and point-of-sale (POS)
machines.
- Loanable amount. $500 to $100,000
-
Payment terms. 1.10 to 1.16 factor rate or $01.0 to $0.16
for every dollar borrowed - Sales volume. $10,000 a year
Here are the current terms for a Shopify Capital loan:
Shopify isn’t a payment platform or POS, but as an e-commerce
software they work with millions of small businesses around the world. Like
Square, they don’t accept loan applications and only offer funding to users
that meet their criteria.
-
Loanable amount. $400 to $500,000 according the
Shopify Capital’s FAQ
page -
Requirements. low risk profile, Shopify Payments
are enabled, and the business is based in the United States, and a certain
gross merchandise volume
Note: These terms are at the discretion of the lender and may change.
How to Decide How Much Business Funding to Get
Robin Parets, CEO
of Pretzel Kids, a company that offers kid-friendly yoga training and
merchandise, used iFundWomen
to raise funds for their online training program and scholarship. Here’s what
Parets has to say on deciding how much funds to raise,
“I carefully chose the
amount I needed based on how much these projects (online training program and
scholarships) needed, and based on the amount I felt I could achieve via
crowdfunding.”
You might be tempted to get as much as you can possibly get, but this approach poses considerable risks both for debt and equity financing.
Huge loans can turn lead to payment challenges and huge interest rates that can
affect your cash flow, while huge equity financing means ceding more
control and ownership of your company.
It’s true that there’s no specific formula or number for the
perfect funding amount, so the key is to find the balance between asking for
too much and too little. The questions below can help you determine how much
funding you need:
- What do you plan to use the money for? Do you need it to
hire people, buy materials, or launch a marketing campaign? - How much profit are you expecting in six months? What about
in one year? - What expenses will you incur as you run the business?
The amount you need will also depend on the manufacturing costs of your product, so consider the costs of your materials and whether you’re manufacturing locally or outsourcing the production abroad. Read this guide from Shopify to help you pick a manufacturer before you decide on an initial funding amount.
Factors to Consider When Choosing Between Different Business Funding
Options
There’s no rule that says you’ve got to fund your new business
solely with loans. You can combine your personal savings, money from different
lenders, and even take on equity financing if your business needs it.
The success of your funding application, however, depends on
several factors. So instead of wasting your time applying for all available
options, it’s better to concentrate your efforts where you’re likely to
succeed.
Think about the
following factors before you apply for financing:
1. Target Market Size and Growth
How big is your target market? How big is it going to be in
a few years?
These are just some of the factors banks and angel investors
consider when approving funding requests.
Some investors also prefer certain industries, like how
angels and VCs prefer tech startups, while some government grants prefer
businesses that tackle challenges in the energy and educational sector.
2. Time Frame
It’s easier to get debt financing compared to equity
financing because investors and grants can take several weeks before deciding on a certain business idea.
Loans from alternate lenders like PayPal and Shopify can be
processed in just a few days, while P2P loans can take a few weeks or a month
to get fully-funded depending on how much you need.
3. Control of Your Business
Are you willing to give someone partial control of your business?
If you’re not open to listen to someone else’s input on running your business,
then you shouldn’t take equity investments. Investors will also hold you
accountable on manufacturing timelines, sales quotas, and other metrics
that affect your revenue so make sure you’re comfortable reporting to someone else.
4. Amount of Funding You Need
You can’t expect to get hundreds of thousands from micro-loan
providers, and you’ll be wasting your time talking to investors if
you’re only looking for $5000 or less.
5. Marketing and Application Materials for Funding
Do you have a proposal ready that’ll entice angel investors?
Do you have a video demonstration and website landing page that accurately
describes your product while talking up its main vantage points?
You’ll need
these and more to get the buy in of both lenders and investors. You can find thousands of the best Business Proposal templates on Envato Elements, with a great offer: download as many as you want for one low price!
Each of the many proposal templates from Envato Elements has hundreds of creative proposal options. While feature-rich, they’re also quick and easy to work with.
You can customize each template with your inspiring business proposal ideas and present your business proposal format with style and clarity to potential investors. That way, each page tells your story—helping you change minds, influence key decisions makers, and make deals.
If you can’t make up your mind about which proposal template to choose, here are some of our best to choose from:
Legal Liabilities and Ramifications of Failing to Deliver to Investors
Not paying your debt can land you in jail—that much is clear.
But not delivering on promised returns to investors? That’s a bit tricky.
Investors can sue business owners for all sorts of reasons,
including when your business fails to take off. In some cases, an angel investor will even file a legal
complaint if their takeover
attempts don’t work (from growthbusiness.co.uk).
“The exact grounds for
a valid lawsuit varies according to the state you chose to incorporate in, the
setup of your business (Corporation or Limited Liability Company), and whether
you have the right language in your business’s governing instruments which
includes your Certificate of Incorporation, Term Sheet, and Operating Agreement,” says Criminal Defense Attorney Vikas Bajaj.
With all the possible scenarios and all the different laws
out there, it’s virtually impossible to protect yourself against all potential lawsuits. So the best thing you can do is get a good legal counsel to draw up your documents
before signing on any financing agreements
Do Your Homework: Avoid Regrets From Choosing the Wrong Small Business
Funding
The time you spend researching available financing options
and the obligations that come with them is time well-spent. It’ll save you
from a ton of headache, which can be anything from dealing with unwanted interference
from an investor or pesky repayment terms from a loan you didn’t fully
understand.
Now that you understand your small business funding options, you’re ready to find the funding you need for your new business. And don’t forget to make use of a business proposal template from Envato Elements to make the best impression on potential investors.
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