How to Obtain Small Business Funding

Every small business reaches the point at which they need more funding to grow. At the beginning it’s simple: you likely can use your credit card or ask family and friends to invest. If things go well, and you’ve exhausted those options, you will need to look for new funding sources so that your business can continue to grow. Thankfully, several options are available.

Traditional Bank Financing

Traditional bank financing is available to businesses that can show financial stability over time and have the documentation to prove it. For banks, it’s all about risk. These are some of the items they may ask for:

• A summary of the company’s business plan.
• Financials, including detailed information on accounts payable and accounts receivable, existing and paid loans, profit and loss history, financial statements (preferably audited or reviewed) and tax returns. Most banks require three years of information, but start-up businesses may be able to show a shorter history.
• Key man insurance.
• Collateral. This is a pledge of personal assets, such as equity in the owners’ personal homes to accounts receivable. For the latter, the bank will check your company’s major accounts receivables accounts to ensure that the companies are solvent. Even then, they will lend only a portion of the amount.

Small Business Administration Loans

The Small Business Administration (SBA) doesn’t make direct loans. Instead, by working with its partnering lenders, including banks, community development organizations and microlenders, the SBA reduces the risk exposure of those lenders. If your business qualifies for an SBA loan, you may be able to secure a loan at favorable rates and terms. Certain populations, such as women-owned, minority-owned and veteran-owned businesses may qualify for special programs. In addition, counseling and education is often available.

Venture Capital/Angel Investors

Some fast-growing companies need a lot of money to fund their growth. Venture capital funds and angel investors can be a solution for these businesses. It isn’t easy to attract these funds, however. Because these funders are taking on a huge amount of risk, they often look for returns that match the risk — sometimes as much as 10 times the investment over five years.

Alternative Funding

Less conventional choices are also available, such as the following:

• Crowdfunding. This nontraditional form of funding is available online from various crowdfunding sites, like Kickstarter, which caters to creative businesses; Indiegogo, which focuses on tech; and Fundly, which highlights not-for-profits.
• Microloans. Microloans are another type of alternative financing. Microloans might be a good alternative for start-ups and entrepreneurs who haven’t been able to secure traditional financing, such as low-income entrepreneurs, women, minorities and veterans. Kiva, Accion, LiftFund and GrameenAmerica are a few sources for this type of funding.

Whichever option works best for you, there is one constant: Do your due diligence. Be familiar with best practices for obtaining a loan, understand the terms of the loan and make sure your financial records are complete.

If you have any questions, contact us today.

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