Find out how you can get funding for your small business through loans, grants and crowdfunding. Discover several of the top small business lenders.
Starting your own business is exciting, but also full of challenges. In order to launch your business, you need the right amount of funding. Before you even think about opening your business, you need to set aside a budget and calculate all the starting costs. According to the Kauffman Foundation, the average cost to start your own business in 2020 was $30,000.
Some of the biggest expenses you must pay in the beginning include equipment, which often costs a third of your starting budget. It may be even greater, depending on your business. There are also various application fees you must pay. While these are relatively small, typically costing under $100, these expenses can quickly pile up. Another big expense is renting office or storage space for your company. This is especially difficult in the beginning, since you must provide a security deposit and down payment before your monthly rental costs. It may seem overwhelming, but there are many ways you can fund your business.
Personal Investment
Before seeking out any outside funds, you must go over your own finances and decide how much you can dedicate to your business. This includes how much money you have on hand, your assets and valuables you can offer as collateral. The majority of funding options all require lenders to carefully look over your personal finances to assess how risky it is to invest in you.
You must be honest about how much you can dedicate to your business. When you are presenting your business plan, lay out which parts of the budget you are already able to pay for, and which needs additional funding. The more you can fund your own project, the safer investors typically feel. It also shows you put a great deal of thought into your business and have enough faith in your abilities to risk your own money.
Friends and Family
Asking for funds from friends and family is informally known as love money. If you receive funding from your friends or family, you must be careful with how you accept the money. If the money is freely offered, this counts as a gift, which means you must report it to the IRS and pay gift taxes. The best way to get funding from friends or family is to phrase it as a loan.
Love money typically provides minimal funding for your company, but it can help with your initial startup costs. One of the hardest parts about requesting love money is separating yourself from your business. Do not get upset if your potential investors have doubts about your business or only want to provide limited funding.
Business Incubators/Accelerators
Business incubators are most commonly associated with tech startups, but they are available for other career paths as well. Business incubators typically do not provide direct funds to a business, but instead offer existing space or equipment. This greatly cuts down on your initial startup costs, allowing you to allocate funding to other areas.
Some incubators will charge reduced fees, while others ask for payment at the end of your contract, once your business has a chance to grow. There are some incubators that instead ask for shares in your business when the contract ends. On average, incubators sponsor a small business for two years, but this may greatly vary based on your business.
Government Grants
Another option to get startup funds is through government grants. Government grants are divided into multiple categories, with many available solely to small businesses. How much funding is available greatly varies depending on the grant. Government grants are competitive and require a detailed business proposal to even be considered for funding. In addition to government grants, you can also check for state grants in your area. The process is similar, but slightly less competitive since you aren’t fighting with all the other small businesses in the United States for funding.
Crowdfunding
One of the newest methods to get startup funds for your business is crowdfunding. Crowdfunding involves running an online campaign, where individuals can view your project and donate funds. Some campaigns require you to meet your goal before any of the funds are released, while others allow you to withdraw funds the moment they are donated. In order to incentivize donations, you can provide different perks and rewards to your donators. This is normally done in tiers, with larger donators getting more rewards.
It can be difficult to predict how much you receive through crowdfunding. Some businesses receive the bulk of funding from a crowdfunding campaign going viral, while others only make a few hundred dollars. Because there is so much variance, small businesses typically secure other rounds of funding before launching a crowdfunding campaign.
Business Loans
Most businesses receive the bulk of their funds from a business loan. A business loan is similar to a personal loan. You must setup a repayment plan and determine interest rates with your lender. Banks and credit unions are primary sources of business loans, but you can also apply through private lenders. During the application process, your personal finances and credit score determine your rates and how much you can borrow. Most lenders expect a business presentation to explain what you need the funds for and how you expect your business to succeed.
Fundbox
Fundbox is an excellent lender for small businesses. You can prequalify for a loan online, which only requires a soft credit check. It only takes a few minutes to find out what types of loans you qualify for. Fundbox is also flexible with how much funding you request. Most other lenders have a set minimum you must borrow, making it difficult to secure a smaller loan. Because it is intended primarily for startups, you can only borrow a maximum of $100,000 from Fundbox.
Fundera
Fundera acts as a loan marketplace, connecting business owners to other creditors, including loans offered through the Small Business Administration. Fundera is a popular option because you can apply for multiple loans through a single application. This is not only a timesaver, but it means there are less credit checks on your account, which can negatively impact your credit score.
Kiva
Kiva is another lender intended for small businesses. Kiva specializes in microloans. These loans have no interest as long as you repay your loan within 36 months, but you can only borrow a maximum of $15,000. Kiva does not have strict eligibility requirements. The company even advertises itself as helping disenfranchised entrepreneurs who are normally denied financial assistance.