How to Finance Your Small Business Venture

What is keeping you from pursuing your dream, your big idea for a successful small business? If you have the time, the courage, and the right ideas to get started, you just need funding to make it happen.

There are quite a few methods to consider to finance your future small business. It’s also prudent to think about the other side of the coin. Let’s be honest–the statistic that 50% of small businesses fail within the first five years can be intimidating. You must know what preventative measures you need to take. Furthermore, you should discuss a potential backup plan with a bankruptcy lawyer before you begin. 

Here are the top ways to finance your small business and what to consider with each.

Traditional Bank Loans
Traditional bank loans are the most popular method to finance small businesses. Their advantages compared to other types of loans include:

  • Potentially faster approval
  • Fewer restrictions on how they can be used
  • Lower, fixed interest rates available

However, you typically need outstanding personal and business credit to qualify for them, especially for unsecured loans where the collateral is not required. So if you are new to the scene or have poor credit, bank loans might not be attainable. You may be able to receive assistance from a co-signer or qualify for a secured loan where you provide collateral.

Small Business Administration (SBA) Loans
SBA loans are another type of loan that a bank or other authorized intermediary lender can provide for you. You need to have pretty good credit to be approved, so it isn’t an option for those with very poor scores, but it tends to be a little easier to qualify for than a traditional bank loan.

There are four main types of SBA loans you can apply for:

  • SBA 7(a) Loans – The Standard Loan: You can borrow up to $5 million for your business funds with the 7(a), but you will need demonstrated business success.
  • SBA 504 Loan – For Fixed Assets: This loan is intended for larger amounts used for things like property and machinery, with a cap of $20 million. It does require a downpayment and a pretty impressive history of repayment.
  • SBA Express Loans – The Fast Option: You can get approved for this loan in a matter of days. However, the interest rate may be higher, and the cap is just $350,000.
  • SBA Microloans – For Startups: If you’re just venturing out into the business world, this loan could be for you. The lending cap is $50,000, which may be just what you need to get started. You will need to make a case that your startup idea is viable.

Other Loan Options
There are a few other loans you can look into for specific needs. These include:

  • Auto loans – For one or more work vehicles.
  • Microloans (Outside of SBA loans) – Available for specific industries and from non-traditional lenders.
  • Commercial real estate loans – Where property serves as collateral.
  • Equipment loans – To specifically purchase work equipment.

These other loan options are available from a variety of places, including banks, private lenders, and nonprofits. They each have their own stipulations, but they’re worth looking into.

There are also cash flow loans, but they are not available for startups. It might be something you’ll find yourself considering down the line should your big ideas come to fruition as a multi-million dollar company. Invoice financing is another type of loan that is good for newer businesses but requires an active sales process. Again, not ideal for a fresh, new business venture.

Vendor Credit, Credit Cards, and Merchant Cash Advance

So when you don’t qualify for traditional bank loans or SBA loans, or if you’re interested in alternate funding ideas, what’s next? You might want to consider credit. Be forewarned that this is a double-edged sword in the business world just as it is in your personal life–Running up credit can help you pay for what you want fast, but you’re typically on the hook to pay it back sooner than a loan.

A business credit card can really help with budgeting if used responsibly. Plus, many cards offer bonuses like cash rewards or airline tickets. A merchant cash advance can be used with a credit card to take out a type of loan. These cash advances are notoriously difficult to pay back, so make sure you fully understand and have a plan for all that you borrow.

A card is not your only credit option. You can also do a sort of trade with a vendor that essentially allows you to buy goods at the moment and pay them later.

These credit options may not seem like ideal ways to get started, but they could help you build your business credit to qualify for bigger loans.

Grants and Other Non-Debt Funds

A source of cash for your business that you will never have to pay back sounds like a dream, but it’s possible through a few different means:

  • Grants – Grants are wildly competitive, but you might be able to secure one by checking all sources. Grants can be government, private, community, or non-profit funded. You could secure tens of thousands of dollars, but even trying for a few hundred is worth it.
  • Crowdfunding – If you’re social media and marketing savvy and have what it takes to go viral, crowdfunding is an excellent way to fundraise.
  • Angel Investors – If your business idea is interesting enough, you could catch the eye of an individual investor who wants to see your business flourish. They will be in it for the long haul to receive equity from your successful venture.
  • Venture Capital – If you’re in tech, finance, or another booming industry, you might catch the eye of a firm that will invest similarly to an angel investor.

A word to the wise–Be careful about donations from friends/family. Mixing business and personal life is always risky, so if you receive any money from a friend or family member, make sure it never needs to be paid back. Or if it’s intended to be a loan, try to agree on the specifics of paying it back ahead of time.

If you’re lucky enough to come by non-debt funds, that’s great, but don’t be discouraged if you need to invest either entirely or partially. Finance your small business venture in any way or combination of methods that make sense to you.

Veronica Baxter is a legal assistant and blogger

Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy Philadelphia bankruptcy lawyer.