Ways to Fund Your Small Business
Small business financing can be difficult to obtain, and at some point, it may even seem like you’ve run out of options. However, there are many different ways to get funding, a lot of which you may not even know. If you think you’ve exhausted all your options, consider some of the sources on this list and dive deeper into the areas you haven’t tried (or reexamine ones you have tried in the past, but were unsuccessful to see if there are different ways to approach the same opportunity).
For more in-depth resources, tips and education, visit our resources pages:
Made popular by sites like Kickstarter and Indiegogo, crowdfunding is the process of requesting funds or small investments from relatives, friends, or strangers to help fund your business. Learn all about crowdfunding, whether it’s right for your business, and how to get started, in our crowdfunding guide.
Microfinancing helps provide financially-disadvantaged small businesses and entrepreneurs with access to capital. Business owners that can show that they are unable to obtain financing from a traditional bank can use microfinancing to gain the funding they need to start their business and gain financial independence. Some companies may be able to acquire financing through a community development financial institution (CDFI), which is funded by the U.S. Department of Treasury to help underserved communities grow and thrive.
You can find a CDFI in your area by:
- Visiting the U.S. Department of Treasury’s searchable award database, or
- Using the Opportunity Finance Network’s CDFI Locator
Peer-to-Peer lending (P2P)
P2P lending allows a business owner to borrow and lend money with their peers in the business space. P2P lending is a method of debt financing that enables individuals to borrow and lend money – without the use of an official financial institution as an intermediary. Peer-to-peer lending removes the middleman from the process, but it also involves more time, effort, and risk than the general brick-and-mortar lending scenarios.
Business Credit Cards
Business credit cards can aid in keeping businesses expenses on track and help in obtaining the purchasing power needed to run a business. Often times business credit cards will provide rewards for business purchases such as airline miles or cash back.
Merchant Cash Advance (MCA)
With an MCA, your business sells a portion of its future credit card sales to an MCA provider in exchange for a lump sum of working capital. In this scenario, your business directs its credit card processor to automatically forward a fixed percentage of its credit card receipts directly to the provider as they are settled.
Learn more about the pros and cons of an MCA on our alternative lending page.
Venture capital is money provided by investors to startup firms and small businesses with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns. This form of raising capital is popular among new companies or ventures with limited operating history, which cannot raise funds by issuing debt.
An Angel investor is anyone who invests their money in an entrepreneurial company. The capital they provide can be a one-time injection of seed money or ongoing support to carry the company through difficult times. Angel Investors are focused on helping the business succeed, rather than reaping a huge profit from their investment.
Business incubation programs are designed to support the successful development of entrepreneurial companies through a variety of business support resources and services. Check out Entrepreneur.com’s overview of incubation programs for the quick facts, or find a program near you: The International Business Innovation Association (INBIA) is “the world’s leading organization advancing business incubation and entrepreneurship.” Their site may be able to help you find an incubator that’s right for your startup.
Business Plan Competitions
Business plan competitions are an alternative source of financing that can be relatively low risk. They typically do not require you to show your credit score or put up collateral, and they also serve as a great way to garner feedback on your plan and gain exposure.
Business plan competitions are often sponsored by universities and can be found in most states.
SBA 7(a) Loans
The Small Business Administration (SBA) guarantees loans to help small businesses unable to get traditional loans through banks.
The 7(a) Loan Program is the SBA’s primary program for helping startups and existing small businesses with financing guaranteed for a variety of general business purposes. The SBA does not make loans itself, but rather guarantees loans made by participating lending institutions.
Small Business Lending Fund
Established by the Small Business Jobs Act of 2010, the Small Business Lending Fund encourages lending to small businesses by providing Tier 1 capital to qualified community banks. Through this fund, banks and small businesses can work together to help create jobs and promote economic growth in local communities across the nation.
Check out this map from Treasury.gov which highlights participating institutions.
Equity Financing is the act of raising money for company activities by selling common or preferred stock to individual or institutional investors. In return for the money paid, shareholders receive ownership interests in the corporation.
Equity Crowdfunding is a hybrid form of funding that combines equity financing with crowdfunding. Instead of just accredited investors being able to provide funds, with equity crowdfunding, anyone can fund a business in exchange for equity in the company.
When starting a new business, some people draw on their personal assets for funding. If you choose this route, keep in mind that most of the options below require paying some amount of interest. So be sure to compare interest rates and take them into consideration before moving forward.
Mortgages are used by individuals and businesses to make large purchases of real estate without paying the entire value of the purchase up front, and the borrower is obliged to pay back with a predetermined set of payments.
Some business owners with 401(k)s, use their retirement account from previous jobs to fund their new businesses.
Bootstrapping is the ability to stretch resources–both financial and otherwise–as far as they can go. It can also be one of most effective and inexpensive ways to ensure a business’ positive cash flow. It means less money has to be borrowed and interest costs are reduced.
Personal Credit Cards
A personal credit card issued by a financial company that gives you the option to borrow funds, usually at point of sale, could help fund minor purchases for your business. Because of the interest rates on credit cards, they are primarily used for short-term financing.
Factoring (also referred to as invoice factoring or accounts receivable factoring) is when a company agrees to “buy” your invoices up front, in cash in exchange for a small factoring fee—usually about 3%. For businesses that invoice their customers for products and services, this can be a quick and easy way to increase cash flow.