Business Financing 101
In this article:
Where can you find funding for your business?
What types of financing are available to you?
Identify the best financing solution for you and your business
You have big dreams for your business, but one main obstacle stands in the way: funding.
This is a common sticking point among ambitious entrepreneurs — and one that, unfortunately, prevents many from reaching their full potential.
The good news? Modern business financing is more diverse than anybody could have imagined even a few short years ago. These days, it's possible to secure funding from a variety of sources — even when, on paper, you might not seem like the best prospect.
Yes, traditional loans and grants are still available, and yes, they're often still worth pursuing. But they constitute a small part of a vast financing landscape that's chock-full of compelling investment strategies.
7 Types of Small Business Financing To Fund Your Startup Company
These days, there's no one "correct" path to getting your business funded and on the path to success. This means it's important to get a sense for the various financing options for small business leaders, as well as the trade-offs they involve.
The following are among the most common small business financing solutions:
1. Traditional Bank Loan
For generations, the conventional bank loan has been the go-to for the forward-thinking business owner. This remains an excellent option for securing competitive rates and general peace of mind.
Business bank loans typically fall under one of two main categories: lump-sum and as-needed payments. Most small businesses seek lump sumps, which are provided on an upfront basis and then paid back over a predetermined period of time. Weekly and monthly payments are common, with loan terms extending anywhere from a few short months to well over a decade.
When bank funding is obtained on an as-needed basis, it's typically referred to as a business line of credit. This can be acceptable for financing a business while in a rough patch but is generally not advised as a long-term business funding option.
2. SBA-Guaranteed Loan
In hopes of encouraging private investments, the Small Business Administration (SBA) provides guaranteed loans. The main offering from the SBA is the 7(a) loan program. These loans are issued by private lenders but backed to some extent by the SBA. With a maximum loan amount of $5 million, the 7(a) approach guarantees 85% for up to $150,000 as well as 75% for those exceeding $150,000.
Depending on your situation, you may be better suited for the 7(a) small loan, which offers business loan financing up to $350,000 — or the express option, which streamlines the process for loans of up to $500,000. The SBA also has pilot programs that serve specialized markets. These are available for brief test periods, with the SBA then either allowing them to expire or making them permanent loan programs.
Loan terms can vary dramatically but typically span seven years when working capital is involved. With equipment that's expected to remain useful for the duration of the loan, repayment terms can reach a full decade. When real estate is involved, loan terms of up to 25 years are available.
Numerous advantages accompany SBA-guaranteed loans, including the opportunity to score both long terms and low payments. Unfortunately, it takes a lot of effort to arrive at this outcome. This program is notorious for its red tape, which prevents many deserving entrepreneurs from getting the financial support they need.
3. Small Business Grant
Depending on the purpose of your business, you may qualify for a grant. This frees you from the obligation to pay back lenders, so it's naturally one of the most sought-after solutions for eligible businesses.
The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs are among the most desirable sources of funding for today's startups.
Both programs are incredibly competitive — to be approved, applicants must demonstrate not only their involvement in federal research and development but also the potential for long-term commercialization. Participants work closely with nonprofit research institutions.
SBIR and STTR are by no means the only small business grant opportunities available. Other possibilities worth exploring include:
Rural Business Development Grants from the U.S. Department of Agriculture
Grants from the State Trade Expansion Program
Corporate grants, such as the FedEx Small Business Grant
4. Online Loans and Investment Programs
These days, a wide range of funding opportunities are available online. Many digital lenders specialize in small, short-term loans designed to provide temporary assistance.
The main perk of working with an online lender? A streamlined process that avoids much of the red tape associated with SBA-guaranteed loans and traditional banks. Digital loans are especially appealing to applicants who struggle to qualify for more traditional sources of funding.
The downsides vary between lenders but typically include higher interest rates and limited loan amounts. Some lenders are more reliable than others, so it's important to do your research.
5. Venture Capitalists
Venture capitalism is heavily romanticized within the American economy — and it's easy to see why. Venture funds have helped spur some of our greatest success stories.
While this arrangement can take several forms, it generally involves an important trade-off: Investors agree to provide startup funding in exchange for an ownership stake. As you'd expect, they're more likely to get involved if they believe that the startup is likely to hit it big.
In most cases, this does not represent a long-term arrangement. The sweet spot for venture capitalists arrives after the startup has shown early signs of profitability — and shortly after it has significantly expanded its profit margin. At this point, private equity investors take over.
6. Angel Investors
Many of today's most impressive business success stories came about due to well-timed interventions from angel investors. This approach typically involves an individual with a high net worth who happens to take an interest in a struggling business and ends up acting as a partner. Often, the angel investor holds significant industry expertise, as well as useful connections that prove nearly as beneficial to the startup as the funding itself.
By providing funds, networking opportunities, and general confidence, angel investors can convince budding entrepreneurs to take greater risks and, hopefully, pursue the most innovative — and potentially profitable — opportunities. In exchange, they receive some level of ownership, such as equity or convertible debt.
The value of this approach depends completely on strategic investor selection. Even then, angel investment always carries the potential for both considerable risks and rewards.
Crowdfunding stands in stark contrast to angel investing and venture capitalism. While a typical angel investor is an individual with access to significant sums of money, donation crowdfunding relies on volume. Under this approach, a large number of contributors can provide a considerable financial boost — even when the individual donations are small.
As with the online lending solutions outlined previously, crowdfunding sites like Kickstarter can be helpful for aspiring entrepreneurs with bad credit. Unfortunately, this approach can be a major gamble. The odds of capturing enough attention to get sufficient funding are slim — and sustainable funding can be tough to come by.
This solution can also take the form of equity crowdfunding, in which the sales of securities are used to finance the business in question. Under this unique approach, securities are available to the general public.
Receive the Financial Assistance You Need To Reach Your Growth Potential
By now, it should be clear that no one business funding solution is ideal in every situation. Strategic selection is especially important for freelancers and sole proprietors, who often lack access to the top sources of funding identified above.
Enter Noumena. We connect the leaders of tomorrow with the funding they need to thrive. Contact us today to learn more about our specialized services and the role they can play in growing your business.