Small Business Funding Options: How to Raise Capital When You Don’t Have Rich Parents
Need cash to start or grow your small business? Learn about the top small business funding options, including having rich parents, SBA loans, bank loans, VC or angel investors, and grants.
Only about half of small businesses survive the first five years in business—and just one in three make it to the 10-year mark. Ouch. How do you avoid being another statistic? It starts with making sure you have the proper funding. In fact, lack of capital is one of the top three reasons small businesses fail.
Where do you find funding? Ideally, your parents are willing to drop a cool $250K on your business idea. Or, maybe your mom happens to know someone on the board of IBM. If you're not that lucky, it might be time to start looking at small business funding options. While business loans and grants are less fun than being a billionaire by age 30, they can still provide the revenue you need to build your small business or take over the world.
Loans for small businesses
Building a small business isn't for the weak. You have to figure out the business structure, hire people, get stock, and how to pay for it all. Good times. The most common way to finance a small business is through small business loans. These generally require a business plan, legal documents, and projections on sales and revenue. They may also check your personal credit.
Here are the most common places to find a small business loan:
- Bank loans: The most traditional type of small business loan involves going to your neighborhood bank and applying for a loan. You'll need to convince the bank you're worth the risk and may be asked to put up assets to prove you can pay. For example, Citibank, Wells Fargo, and Chase all offer business loans. However, these institutions tend to be risk-averse, so you'll have to prove your business is viable.
- SBA loans: The small business administration is a government agency that supports entrepreneurs and small businesses with resources and loans. They don't provide loans directly. Instead, they back loans from other sources. The requirements tend to be slightly less stringent than traditional bank loans but can require a bit of leg work to prove you're worth the risk.
- Fintech loans: Not down with a traditional bank loan? Many fintech platforms, like PayPal and Fundbox, use AI or machine learning to analyze credit scores and offer business loans. This can make funding more accessible if your business doesn't qualify for traditional bank loans.
Business loans give you the capital you need—but they come at a price. You'll have to submit to underwriting, provide a business plan, and set up a plan to pay those funds back. Terms and interest rates can vary drastically by lender, so shop around.
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Grants for small businesses
Who wants to borrow money when you can get free money?? Grants, unlike loans, don't have to be paid back, making them an excellent option for businesses that aren't approved for enough funding through loans or who only need a small amount. Of course, each grant has its own requirements, so expect to provide a business plan and projected income. You may also have to submit a reason why you should be considered.
- SBA grants: In addition to business loans, the Small Business Administration also offers a limited number of grants for nonprofits, resource partners, and educational organizations.
- Grants.gov: Apply for business grants from the federal government. You can search for specific funding opportunities or learn about the grants offered in the "Learning Center." Eligibility varies by grant but generally targets non-profits, public housing organizations, educational organizations, and small businesses.
- Minority Business Development Center (MBDA): A government organization with resources and grants for minority-owned businesses looking to expand. This organization specifically targets people of color, women, and underserved communities.
Several corporations also offer business grants, including Walmart, FedEx, and Wells Fargo. Your state may also provide business grants and resources, so Google "your state business grants." California, for example, provided local businesses with $3.1 billion in grants, financing, and other business incentives.
Alternative funding sources for small businesses
Loans and grants are the more traditional small business funding sources, but they aren't your only options. Here are a few alternative funding sources to help build or grow your small business.
- Crowdfunding: Using platforms like Kickstarter or Fundable, you can raise funds for your business in exchange for rewards, early access, or product discounts. Asking for donations isn't a guarantee, but it can work well for innovative offerings.
- Venture capitalists: Venture capitalists (VCs) are private equity groups that provide funding to companies with high growth potential in exchange for a portion of the business. This type of funding is generally for early-stage tech companies.
- Angel investors: Like venture capitalists, angel investors provide funding for new businesses, often in exchange for a portion of the company (think Shark Tank). Unlike VC, these aren't firms but rather wealthy individuals who invest their own money. AngelList is one of the most popular angel investing platforms.
- Peer-to-peer lending: With peer-to-peer lending, businesses can take (often small) loans from other individuals. The platform you select handles interest rates and terms; and facilitates the transaction. Popular P2P lending sites include Prosper and Kiva.
- Pitch competition: Pitch competitions are contests where hopeful business owners pitch their business idea for the chance to win financing, often in the form of grants or loans. If you have an innovative idea, these can be a good option—but they're also highly competitive.
Once you get funding, you'll want top-notch ways to manage (and spend) your money. ClearSpend is a spend control and expense management solution built for small businesses. Our platform is built using insights from small biz owners and their accountants/bookkeepers to provide the tools you need for long-term success. Learn more about how we can help you keep expenses under control.
Final thoughts on small business funding
Many business funding options target specific populations or people living in certain locations, so look for applicable loans and grants that serve your area or demographics. For example, there are tons of loans and grants for women, veterans, people of color, the LGBTQ+ community, and those with different abilities.
If those funding sources don't work out, you can always try being born to rich parents. 🤷