Starting a business is an exciting journey, but it can also be challenging, especially when it comes to raising funds for your business. A lack of capital can be a determining factor in the success or failure of your business. Therefore, it’s essential to understand your options and the best practices for raising business capital. In this article, we’ll provide you with 8 popular funding options for small businesses, along with insights, ideas, and best practices to help you raise the funding you need.
1. SBA Loans
SBA loans are loans guaranteed by the U.S. Small Business Administration (or SBA), and they are a great option for small business owners. SBA loans generally offer lower down payments, longer-term financing, and lower interest rates compared to conventional loans. They are also great for long-term cash flow management, such as working capital, purchasing equipment, and refinancing debt. However, the application process for SBA loans can be more rigorous than other loan types given their nature of being government-backed. To be eligible for an SBA loan, SBA lenders require your business to be for-profit and operating in the U.S., meeting specific creditworthiness requirements, and the applying business must have exhausted other options from non-government sources.
2. Term Loans
Term loans are a type of business loan that provides a lump sum amount of cash that’s repaid over a fixed period, generally one to five years. This type of loan can be used for various purposes, such as purchasing equipment, opening a new location, or hiring employees. Term loans have fixed interest rates, monthly payments, and repayment terms. However, term loans are usually more expensive than other types of loans.
3. Equipment Loans
If you are looking to purchase equipment for your business, an equipment loan is an excellent option. An equipment loan provides funding to purchase business equipment and machinery. The equipment serves as collateral for the loan, which means the lender can repossess the equipment if you fail to make payments. Equipment loans have lower interest rates, terms ranging generally from one to five years, and are often easier to qualify for than other types of loans.
4. Lines of Credit
Lines of credit are a flexible option for businesses that need access to cash on an as-needed basis. A line of credit provides a set amount of funds that can be used when needed. Businesses typically use lines of credit to cover short-term expenses, such as payroll, inventory purchases, or emergency situations. Lines of credit can have variable interest rates, and the amount of available credit decreases as funds are borrowed.
5. Equity Financing
Equity financing occurs when you sell ownership in your business in exchange for capital. This option is a great option for companies that are growing rapidly and require substantial funding to continue growing. However, this option can lead to a loss of control and ownership because investors usually demand a percentage of ownership in return for their investment.
Crowdfunding is a relatively new financing option where a business owner raises funds from a large number of people via the internet. This option involves setting up a campaign on a crowdfunding platform, like CrowdFunding or Kickstarter, and offering rewards to investors, like exclusive, limited edition, or first-run offerings. This option is perfect for startups and small businesses that are looking to raise a small amount of capital and don’t want to take on debt or equity. Crowdfunding platforms take a percentage of the funds raised as a fee.
Grants are a source of funding that does not require repayment. Grants come from government organizations, private foundations, and corporations. Generally, grants are offered for businesses in specific situations or those solving addressing a specific market need. However, obtaining grants can be challenging because competition can be fierce for limited funding. Grant applications can also be time-consuming to complete.
8. Friends and Family
Friends and family are a great source of funding for small businesses. However, it’s important to be cautious when borrowing from friends and family to avoid damaging existing relationships. Make sure to create a formal agreement outlining the terms of the loan, including the amount, repayment schedule, and interest rate.
Funding Your Business Can Be Easy, When You Know Where to Look
Raising capital for your business is essential for success, and there are multiple options available to you. As an entrepreneur, it’s important to evaluate all of your options carefully before deciding which one is right for you. With Backabl, you can review a curated list of loans, grants, and other funding opportunities from the best community lenders and credit unions. Click here to create a free account!