How to Finance Your Small Business – The Ultimate Guide

Last Updated on November 15, 2023 by Dr. Gabriel O’Neill, Esq.

Starting a business can be an exciting prospect. One of the biggest questions you’ll have to answer starting off is how to finance your small business. After coming up with an innovative business idea, you will need funds to get things going. Luckily, there are numerous financing avenues out there that can help get your business off the ground.

Here’s a comprehensive guide to everything you need to know about financing your small business. 

Common Ways to Finance Your Small Business

Before getting into the nitty-gritty of business financing, you need to understand a few terms and types of financing. 

You can finance your business through your personal savings or by sourcing money from family and friends. These two are considered internal financing since you’re not officially borrowing money from investors or lenders. 

When it comes to external business financing, there are two types through which you can fund your business: equity and debt. What do these terms mean and which funding sources fall into these categories?

Internal Business Financing

1. Personal Savings – Bootstrapping

Every new business owner will look to themselves when it comes to business financing. Using your personal savings or bootstrapping is one of the most common ways to finance your small business. A benefit of that is you don’t have to worry about paying anyone back or going into debt. As a new business owner, it can be difficult to make monthly payments to finance debt when your business is still in the budding stage.

The downside of using your personal savings is that it can be risky. If your business, unfortunately, ends up failing, you will lose pretty much all of your money. Also, your personal savings will only take you so far, therefore, you would have to look for other financing sources, eventually.

2. Sourcing Money From Family and Friends

Getting financial help from your family and friends is another option if you don’t have any personal savings. Asking the people you know to invest in your business has an upside, they will offer you better terms as compared to an external lender. 

For example, if you ask your parents for a loan, they will give you the money interest-free. You won’t get this kind of deal from an online or traditional lender. On the other hand, if your business doesn’t work out, you will have trouble paying back the money you borrowed, which could hurt your relationships.

It helps to run the numbers and calculate estimated revenue projections that can help you figure out the amount of money you can pay back. 

External Business Financing

Equity

An individual who uses equity to fund their small business takes the money from an investor by giving them an ownership stake. The business owner is under no obligation to pay back the investor, which is one of the benefits of equity. However, the business owner has to give up a portion of their business’s ownership, therefore, not having complete control over the company.

Here are the different funding sources that fall under the equity category.

1. Angel Investors and Venture Capitalists

Both angel investors and venture capitalists can help you finance your small business. These funding sources don’t require borrowing any money. As a business owner, you will be getting funding for your business from companies or individuals that invest in startups. 

The main advantage of these types of investors is that you don’t have to pay them back. So, in case your business doesn’t work out, you won’t be left with a large business loan debt. Of course, you will not get this money for free. You will be required to give up some control of your business in order to receive an equity investment from venture capitalists and angel investors.

2. Crowdfunding

Crowdfunding platforms are responsible for helping business startups by providing them with funding. You would have to develop a proposal on the platform explaining everything about your business and what the funding will be used for. Different investors will see your proposal and make their final decision to provide funding or not based on that.

There are two types of crowdfunding platforms: peer-to-peer and rewards-based crowdfunding. The former requires you to pay back the investors just like any other loan, while the latter requires you to offer the investors some type of reward instead of paying them back. 

For example, if your business created a new fitness tracker, you will be required to offer the prototype to the biggest investor of your business.

If you pick this option, make sure that you read the fine print and do more research.

Debt

In the case of a debt, the lender gets a signed document for their money, where all the important details are listed, like the dates, terms of repayment, the interest, and so on. When you choose this business financing option, you have complete ownership of your company.

However, you are under obligation to pay back the money. If you fail to do so, your lender can move your company into liquidation when under certain circumstances.

Here are the different funding sources that fall under the debt category.

1. Business Loans 

Applying for business loans is another way for you to finance your small business. You have several options to choose from:

• Long-term loans
• Short-term loans
• Development loans
• Financing for equipment

Keep in mind that it might be harder to get certain business loans as compared to others, especially for a new business or a business with a poor credit score. Plus, it might be difficult to get a term loan through a bank. In this case, a lender will be more flexible to offer funding to a new business.

2. SBA Microloan Program

The SBA (Small Business Administration) is responsible for helping several small businesses through their financing programs. The SBA’s microloans are ideal for you if you’re looking to finance your small business. Their microloan program offers new business owners up to $50,000 for their startup, which is quite a generous amount for a brand-new business.

This option is ideal for people who don’t need a lot of capital to start their business or won’t take as long as six years to pay the money back. Plus, with SBA microloans, you are more than likely to receive competitive rates as compared to other traditional financial institutions. Not to mention, their interest rates are very low.

3. Business Credit Cards

Another way you can finance your small business is through credit cards. This method makes it easy to get the money you want and pay later. Business credit cards are similar to regular credit cards, where you draw from your credit line whenever you need to spend money on your business.

The more monthly payments you make, the more credit you free up which you can use for other business-related expenses. Also, you only pay interest for the credit that you used. This is a more flexible option for business financing.

Remember to keep your personal and business credit cards separate as it can get complicated when you use one credit card for all expenses. Also, always remember to read the fine print when getting a business credit card, pay special attention to:

• Annual fees
• Rewards programs
• Introductory and regular APRs for balance and purchase transfers
• Card benefits 

Your credit score matters when applying for any type of credit card. You have a higher chance of getting your credit card approved with a good credit score.

4. Factoring

This is another method through which you can learn how to finance your small business. This is especially helpful when you already have a decent cash flow and customers coming in. When it comes to factoring, you will sell your accounts receivables in order to finance your small business. 

You will receive the funds from a factoring company based on your receivables’ value. You can repay what you borrowed as the invoices get paid, depending on how your financing company works. The lender can also directly collect the payment from your customers.

This is the ideal financing option for you if your credit history and operating history don’t qualify you for the other types of business financing. On the other hand, a downside of factoring is that it could get expensive as lenders can charge a hefty fee, instead of the standard annual percentage rate.  

Small Business Finance Tips

When you are thinking about how to fund your business, many factors come into play, such as your background, the small business idea you chose, your financing options, and so on. By following the tips below, you will learn how to finance a small business startup.

1. Calculate How Much Funds You Will Need

When making a business plan, calculate your budget and come up with an estimate of how much funds you will need to launch and run your business. If you are looking for a one-time sum that’s small, then a business loan might be the right fit for you. However, if you need a bigger contribution, then an angel investor is the ideal choice. 

When you calculate your funds beforehand, you are better able to make an informed decision regarding your funding needs.

2. Work on a Business Plan

50% of businesses fail within five years due to improper business planning. Before you ask anyone for money, make sure you have a good business plan in place. No one will give you their money without looking at your business plan. In your plan, you should include the following:

• Outline the opportunity
• The team
• Target market
• Marketing plan
• Industry implementation
• Required funding
• Financial summary

A business plan template that includes all the above-mentioned information makes it easy to pitch your ideas.

3. Check Your Financial Health

In order to find out the type of financial funding that’s right for you, you need to check your current financial health. Collect all the personal and business tax returns, profit-and-loss statements, bank statements, revenue projects, and so on, to help your investors understand how much funding you need and how much you already have.

4. Conduct Thorough Research on Your Funding Options

Even though there are numerous funding options available, you have to make sure that you pick the one that’s specific to your business. Before making your final decision, conduct comprehensive research on different funding options. There are numerous resources available about how to fund a small business, how to apply for loans, how you can get in touch with investors, and so on.

5. Create a Repayment Plan

Taking any amount of capital is a massive responsibility, especially if you have to pay it back in some form. Therefore, it’s a good idea to create a repayment plan in advance when it comes to giving back the borrowed money. 

Use a business loan calculator in order to estimate payments and add them to your budget. Do not take the funding if you believe you cannot make the payment.

How to Evaluate Startup Costs and Expenses?

Prior to planning how you can finance your small business, calculate the amount of money you might need for the startup cost and other expenses. Whether it’s an online store or a brick-and-mortar business, keep the following things in mind when calculating your expenses:

• Insurance for your business
• Permits and licenses
• Accounting or legal assistance
• Registering your business
• Copyrights, patents, or trademarks for your products
• Creating a business website 
• Equipment needed for production
• Shipping supplies
• Utilities and rent (for physical businesses)
• Marketing materials (digital and print)
• Market research
• Sales or marketing platforms
• Content management system subscriptions

As your business grows, you might have to add the following expenses to your list:

• Salaries of your employees
• Travel expenses
• Utilities and rent for your office space
• Different events, conventions, and conferences

This list is just a starting point, as the need of every small business is different. You can add all possible expenses that you need for your startup. Once your list is complete, you will have an estimation of your total startup cost.

Also, financial literacy is an important skill to have for every business owner. This allows you to work with income statements, balance sheets, statements of cash flow, and other important documents. Being aware of all this shows that you are a responsible business owner.

How Difficult Is It to Fund a Startup Business?

Financing your small business is a challenging process at times. However, keep in mind that starting a business requires some sort of investment which needs a certain amount of time to succeed. 

Sometimes, new startups have to quickly acquire funds in order to grow and succeed within their industry. However, sticking to certain lending requirements with no existing financial information can be hard. Despite these hardships, there are numerous financial resources out there that can show you how to finance your small business.

How to Finance Your Small Business – Frequently Asked Questions

How to Finance a Small Business Startup – Conclusion

In conclusion, your reasons for starting a business might be good ones, but your business won’t come to fruition without financial backup. Fortunately, there are several options available that can help you choose the right financing plan for your specific business.

Make sure to focus on the needs of your business and try to make all the right decisions when it comes to its finances. A well-thought-out financial plan could be the thing that leads your small business to success.