Owners of small and medium-sized businesses often struggle to raise capital to build and sustain their ventures. This happens because most traditional lenders are risk-averse and often favor larger, established organizations. Such lenders usually expect their borrowers to have a strong credit history, proven operational success, and substantial assets and collateral, all of which may be beyond small businesses. Fortunately, several reliable funding options help small businesses secure the capital required for growth.
1. Equity funding
More often than not, small business owners seeking funding options to finance their organizations will have to relinquish a portion of their ownership in exchange for capital. Equity financing is one such option, which is typically provided by venture capitalists, business owners’ family members, friends, and angel investors. To receive funding from investors, business owners must first pitch their business model and future growth plans. If the investors find the proposal compelling, they will invest in the organization in exchange for a percentage of its ownership. Business owners can also benefit from mentorship, industry contacts, and insights from investors when they opt for equity financing.
2. Crowdfunding
As the name suggests, crowdfunding helps raise capital for small companies when business owners gather small contributions from a large group of people. Often done online, crowdfunding is an effective financing alternative for small businesses that have a unique value proposition that benefits and serves the needs of crowdfunders.
Any amount of money can be raised through crowdfunding. More importantly, unlike equity financing, this form of funding does not require owners to give up ownership of their company or take on debt in exchange for capital. Instead, crowdfunders expect a gift or perks like early access to the business’ products in exchange for their support
3. SBA loans
The US Small Business Administration (SBA) is a federal agency that works to make it easy for small establishments to survive and thrive, especially in their initial phases. They offer loan programs that help small businesses secure financing while setting specific guidelines to minimize the lender risk. The SBA offers lenders, typically including traditional banks, a federal guarantee on every loan they provide to small and upcoming companies. The guarantee makes it less risky for such lenders to provide financing to small businesses. Additionally, such loans are often associated with favorable interest rates and flexible terms. SBA loans come in various forms, including SBA 504 loans, SBA microloans, and SBA 7(a) loans. The most popular option is the 7(a) loans, as small business owners can utilize these for a wide variety of services and avail up to $5 million.
4. Online loans
The evolution of the internet and e-financing has made online loans one of the best and the most convenient funding alternatives for up-and-coming businesses. The relatively lenient credit score constraints make this option ideal for small business owners facing credit-related challenges. Besides this, another advantage of online loans for small businesses is their speed of approval. Several online lenders approve and fund applications as quickly as within 24 hours.
Furthermore, online lenders can offer a wide variety of funding options, such as invoice financing, lines of credit, and term loans. But, these loans are often associated with a marginally high cost of borrowing, with annual percentage rates ranging anywhere between 10% and 79%. So, small business owners must evaluate the repayment terms thoroughly to ensure affordability.
5. Credit union financing
These lenders are among the most popular funding avenues for small establishments. Arguably, the biggest benefit of credit union funding is its versatility. Credit unions can offer SBA-backed loans, traditional term loans, business credit cards, and lines of credit. These unions function on a membership model. A small business will need to be a member of a specific credit union to utilize its benefits. At the same time, the co-op nature of credit unions often links them to the community. This means that members can reap the benefits of visibility in the community and also build personal relationships with other union members to unlock better growth opportunities.
6. Government grants and programs
Apart from SBA loans, small businesses can also seek direct benefits from the government to develop and grow. Both federal and state governments offer grants and many initiatives designed to safeguard small businesses in the competitive market. Several popular grants and programs fall under this category.
- Small Business Innovation Research (SBIR) grants for R&D projects
- Small Business Technology Transfer (STTR) grants
- Environmental grants for green businesses developing sustainable solutions
- Rural business grants for organizations operating in small towns
- State trade and export promotion grants to sell products/services globally
7. Peer-to-peer lending
Also known as social lending, this funding option involves business owners borrowing and lending money to and from other proprietors. Peer-to-peer lending blends the characteristics of traditional loans with angel investment and crowdfunding. Small business owners can find multiple online platforms that act as pitching services to connect them with investors for funds. Besides, this option also fosters a sense of community among the various businesses involved. Business owners can utilize this financing option to cover the cost of tools and equipment, consolidate debts, and for expansion purposes.