What basic options are available to fund my small business?
There are several options when it comes to funding your small business. If you do not have the cash on hand, you might want to explore the following for your small business:
Traditional or non-traditional banks
Small businesses can get a bank or credit union loan, which may have a better interest rate than a credit card. Bank loans, however, have their own drawbacks. Some banks may not work with a brand-new business until it shows sustainability. They may require collateral, such as an interest in your business’s real estate, your personal real estate, or a personal guarantee.
Some banks offer loans backed by the U.S. Small Business Administration (SBA). These loans are tailored to businesses just starting, so you may not need as much collateral or credit history to qualify.
Loans from family and friends
If a family member or friend is willing to invest money into your venture, that can be a great place to get financing. Some friends or family members may simply offer a loan, but others may want a part of your company. For example, your friend might inject cash into your company in exchange for a percentage of the ownership. That way, they have a stake in the company’s success.
If a friend or family member gives you a loan, you may want to formalize it with a Promissory Note, which sets out the terms and conditions of the loan, including repayment amounts and timing. Even with loans from close friends and family, a formal agreement gets everyone on the same page.
Credit cards
Interest rates on credit cards can be high, which means debts can add up quickly if you do not make timely payments. As a result, credit cards may not be a good idea for long-term financing. Many business owners, however, will charge certain short-term expenses to credit cards. A company credit card may be a good short-term solution, especially if you need quick cash flow to cover immediate expenses at your company.
Angel investors
An angel investor provides financial support (sometimes called venture capital) for startups, new businesses, and entrepreneurs in exchange for ownership equity. Typically, these investors see promise in the new business and want to be a part of it.
Angel investors may take a percentage of equity through a direct ownership agreement (sometimes called an Investors Agreement) or by receiving stock.
Grants
Many small businesses qualify for federal, state, or local government grants, which may be available to a specific industry or sector.
For example, the SBA provides federal grants for:
- Management and technical assistance (Small Business Technology Transfer or STTR).
- Research and development, generally to support commercialization of research (Small Business Innovation Research or SBIR).
- Certain community organizations (such as those that support veteran-owned companies).
The SBA’s website includes detailed grant descriptions that may be helpful for small business owners. The SBA also provides a wide variety of business resources beyond grant opportunities.
What is the easiest way to get my small business off the ground?
The most common way small business owners fund their new business is through personal savings or assets. Still, this approach may be risky if it puts the small business owner’s assets and financial well-being at risk. After personal investments, other common funding options include commercial loans from a bank or credit union, and financing from family, friends, or investors.
What is the difference between a grant and a loan?
The biggest difference between a grant and a loan is that the loan must be repaid, but a grant does not. Essentially, a business grant is assistance that supports entrepreneurship. It is, essentially, free money for those who qualify.
Another difference is a grant could have more stringent terms and conditions compared to a typical business loan. For instance, the application process for a business grant may be targeted toward specific industries. Some grant applicants must meet certain criteria, such as being a woman-owned or minority-owned business, or predominantly servicing low-income clients.
The pool of money from small business grant programs is limited, and not every business that qualifies and applies will get a grant. Those who do receive a grant may be required to use the funds a certain way or for a specific purpose. Loan money generally is not as restrictive.
Unlike a grant, loan eligibility requirements will often focus more on financial criteria. The bank or other lender must evaluate the company’s ability for repayment, which is less of a concern for grants. Grant applications tend to prioritize a business’s ability to meet a stated goal or provide a certain benefit to an industry or community with the provided funds.
How do I find small business grants?
Government agencies are the most likely to have grants available for small businesses. Check www.grants.gov for a listing of federal opportunities.
State and local governments also offer small business grants. Check out your local resources by searching for any of the following:
- Economic Development Board (or Economic Development Administration).
- Small Business Development Center.
- Minority Business Development Agency Center.
- State Trade Expansion Program.
- National Association for the Self-Employed.
Your local Chamber of Commerce might also have helpful resources to track down available grant programs in your area. Nonprofit organizations occasionally offer grants to support qualifying small businesses as well.
How do I get a small business loan?
First, you need to decide where you want to apply for a small business loan. A bank or the SBA will often provide the most competitive interest rates, but it can be difficult to qualify for these loans when starting out. Your personal bank may be a starting point to learn more about your business loan options.
You may be asked for extensive information about your business before applying for a loan, including your tax ID, a business plan, financial statements, potential collateral, and the business owners. Each lender is different, so ask questions when you discuss a commercial loan.
If you have more questions about funding and financing your business, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
