If you’re starting a new business, you may need funding. There are many different financing sources you could use. However, not all options are suitable for all types of businesses. Understand how each alternative works and why it may or may not be a viable choice.
Common Sources of Business Funding
In some cases, business owners draw on several financing options. The most common sources of funding to start or grow a business include:
- Personal investment
- “Love money”
- Venture capital
- Angel investors
- Business incubators
- Government grants and subsidies
- Bank loans
- Small Business Administration (SBA)
Many business owners use personal savings or investments to get their businesses started. Of course, you may have to borrow the remainder if you don’t have all the necessary funds. But having some of your money invested in the business proves to banks and other lenders that you are ready and willing to take the risk.
Love money is funds from family members, friends, and other loved ones who want to help you get your company off the ground. If you use love money, there are some items to keep in mind, such as:
- Friends and family might not have a lot to invest
- Investors may want to have equity in your company
- You should put your repayment agreement in writing
Venture capitalists take an equity position in your company in return for lending you money. They also typically expect a return on their investment. Unfortunately, venture capital is not a good strategy for many smaller companies.
Often, venture capitalists are looking for technology-driven businesses and other companies with high-growth potential. If venture capital is a good fit for you, make sure that you align with investors who bring relevant experience and knowledge to your business.
Angel investors are usually wealthy individuals who invest directly in small companies. However, these individuals can also offer you knowledge, experience, and resources since they often invest in start-ups in a familiar industry.
In addition, angel investors will typically reserve the right to supervise the company’s management practices. They may also reserve a seat on your board of directors (although they usually keep a low profile).
Business incubators usually focus on high-tech companies. They generally offer support for new businesses throughout the various stages of growth. Sometimes, a business incubator may allow your company to use its administrative staff and other helpful resources.
Typically, businesses are in the incubation phase for up to two years. The new company’s next move is to go out on its own. Some of the most popular industries that business incubators serve are:
- Information technology
- Industrial technology
Government Grants and Subsidies
You may also obtain business financing from various government sources. For example, some government agencies provide subsidies and grants. Be sure to check both state and federal government resources for available seed money options.
Before the government provides you with funding, you will likely have to submit detailed information such as a(n):
- Description of your company
- Explanation of how your business or product is beneficial
- Work plan with a complete cost estimate
- Your background and experience, and that of your management team (if applicable)
- Application form(s)
After the government agency receives the information, a reviewer will assess your proposal based on the following criteria:
- Need for the grant or subsidy
- Your experience
Some of the common problem areas that could lead to the agency rejecting your proposal include the following:
- There is an unrealistic amount of work
- Your research plan lacks focus
- The research is not relevant
- Your company’s geographic location is ineligible
- You have not proven the relevance of your idea(s)
- The proposal does not have a strong rationale
- Your company is not a good match for the available funds
New business owners often go to banks to seek out funding. Banks can offer several advantages, such as customized repayment plans and personalized service. This is particularly true if you have been a bank patron for many years. However, before you commit to a bank loan for your business, you should shop around and find one well-suited to your specific needs.
Also, most banks will require you to provide a solid business plan. Many banks may also want your company to have an already-established track record. So, in some instances, this type of funding may not be feasible for start-ups. In addition, the bank may require you to provide a personal guarantee for loan repayment. So, if your business fails, you will still be responsible for repaying the money.
Small Business Administration (SBA)
The U.S. Small Business Administration (SBA) helps small businesses obtain funding by setting guidelines for loans that can reduce lenders’ risk. Therefore, an SBA-backed loan can make it easier for your company to obtain the funding it needs.
The Small Business Administration has many benefits for helping your company obtain financing. These include:
- Competitive terms. These are loans the Small Business Administration guarantees usually have rates and fees comparable to non-guaranteed loans.
- Unique benefits. SBA-backed loans also typically require a lower down payment than regular bank loans. In addition, some SBA-backed loans do not require any down payment.
- Education and counseling. The Small Business Administration also offers education and resources to help new business owners understand how the borrowing process works.
Do You Have Adequate Financing to Start or Grow Your Company?
There are many ways new businesses may be financed. But the process can, at times, be overwhelming. With that in mind, you should seek guidance from an experienced business financing expert who can help you obtain the capital your company needs, now and in the future.