Growing your company is a simple goal, but the small business funding you need to make it happen? That’s more complex.
The good news is that there are many solid small business funding options; the biggest hurdle is determining which ones are right for you.
From venture capital investment to microloans, we’ll discuss 4 of the best financing options for small business owners.
Loans vs. Investments
Before we get granular on financial funding for small business, you need to decide whether you’re interested in a loan, investment or both. The biggest differences between loans and investments are the level of ownership, control and cost you’ll retain.
With a loan, lenders typically don’t want to be involved in every decision. Oftentimes, they have fixed repayment plans and lower risk, especially with collateral-backed loans. That means lenders tend to focus on recouping the debt. As long as you make payments on time, they’ll likely be hands-off. Long-term, interest on debt is usually lower than the equity that goes to investors.
Investors, on the other hand, have a stake in your company and may want more control. They’re taking on more risk, which often results in higher required ROI. The benefit of investors is that you repay them in equity rather than loan repayments, and some small businesses appreciate the security, guidance and support investors offer. Ultimately, it’s up to your business to determine what model will work best for you.
Small business funding option #1: SBA’s loan guarantee program
When considering major funding options for small businesses, the U.S. Small Business Administration (SBA) is a good first stop. The agency doesn’t lend money to business owners themselves but instead sets guidelines for loans made by its partners. That allows the SBA to reduce lenders’ risk and help them access capital while also making it easier for small businesses to get loans.
Because the SBA is an established, government-backed organization, it offers multiple small business funding options.
COVID-19 Relief Options
In today’s economic climate, one of the best small business funding options is to be sure that you’re taking advantage of all the COVID-19 relief options at your disposal.
Check out and apply for applicable programs, including the:
- Paycheck Protection Program (PPP)
- COVID-19 EIDL, which provides relief for temporary loss of revenue
- Restaurant Revitalization Fund
- Shuttered Venue Operators Grant
- Debt relief for existing SBA loan borrowers
- Cross-program eligibility for small businesses that qualify for multiple types of assistance
Lender Match
One of the most straightforward company funding options from the SBA is lender match, which connects your business with lenders offering SBA-backed funding.
The process is simple:
- Describe your needs by answering a 5-minute questionnaire.
- Get matched with lenders who are interested in your loan in as little as a few days.
- Talk to lenders to compare rates, terms, fees, etc.
- Submit an application.
Before you apply for lender match — or any funding, really — it’s a good idea to have the following ready:
- A business plan (which the SBA will help you create free)
- Financial projections
- Collateral (home, car, property, inventory)
- How much capital you need and how it will help your business
- Credit history to determine risk and interest rates
But remember: the SBA can help guarantee loans for businesses that might not qualify for traditional loans, so ask or apply even if you think you don’t check all the boxes.
7(a) Loans
The most common SBA financing option for small business owners is the 7(a) Loan Program. It offers loans up to $5 million to small businesses that need:
- To acquire real estate as part of a business purchase
- Short- and long-term working capital
- To refinance current business debt
- To purchase furniture, fixtures and supplies
Eligibility for 7(a) loans is based on what your business does to receive income, credit history, and where you operate.
504 Loans
The 504 Loan Program offers:
- Long-term, fixed-rate financing
- Up to $5 million
- For major fixed assets that promote business growth and job creation
504 small business funding is administered by Certified Development Companies (CDCs), which are SBA partners that promote economic development within their communities.
You may be eligible for a 504 loan if your business:
- Is a for-profit company
- Operates in the U.S.
- Has a net worth under $15 million, and
- Generated an average net income of less than $5 million after taxes for the last 2 years.
Use your 504 loan to buy or build new facilities, equipment or land. Or, simply to improve land, streets, parking, facilities and more.
Small business funding option #2: Microloans
Microloans are one of the best small business funding options because they’re not issued by banks or credit unions, which means there’s more freedom when it comes to terms. Instead of traditional institutions, these loans are issued by a single person or group who contributes toward the total amount.
The SBA offers microloans of up to $50,000 to help small businesses start up and expand. These microloans are administered by the same community lenders vetted for experience in lending, management and technical assistance. Most require some collateral as well as the personal guarantee of the business owner.
Using this type of financial funding for small business, you can repair, enhance or improve your business by allocating funds to:
- Working capital
- Inventory
- Supplies
- Furniture
- Fixtures
- Machinery
- Equipment
If you’re concerned about bad credit or lack of collateral, consider online commercial lenders such as Prosper, SoFi or Best Egg, who may be able to take on higher levels of risk.
Small business funding option #3: Crowdfunding
One newer small business funding option is crowdfunding, aka using small amounts of capital from a large number of people to finance a new venture. Crowdfunding is often powered by social media or websites dedicated to bringing investors and entrepreneurs together — think Kickstarter, Indiegogo and GoFundMe.
Many crowdfunding projects are rewards-based, which means investors get to participate in product launches or receive gifts at certain stages. The biggest benefit of crowdfunding for small businesses is that it vastly expands your pool of investors.
Small business funding option #4: Venture capital
Another popular company funding option today is to secure venture capital (VC) funding. Venture capitalists are investors who provide money to businesses with high growth potential in exchange for equity.
VCs are usually formed as limited partnerships. People invest in a fund that supports multiple concepts, knowing there’s a high risk of failure since these companies are often just past the startup point and still growing. VCs can be an excellent low-touch option because investors can come in, buy a stake, nurture your growth and then cash out with a substantial ROI as soon as possible. That means you get short-term financial support with fewer long-term equity-related concerns.
Small business funding and time tracking
As you sift through all the financing options for small business owners, take time to consider where your business is currently making its money. (Investors and lenders certainly will.) Which types of projects are most lucrative? When are your employees most efficient? Where are your growth opportunities?
For small businesses, time tracking can unlock many of those answers. Companies who use a solution like Time Tracker have access to detailed insights that identify operational inefficiencies, show which clients make (and cost) you money, and give you the hard data you need to make informed decisions fast.