The old saying ‘money doesn’t grow on trees’ certainly rings true for new entrepreneurs. One in three new entrepreneurs begin their small business with less than $5,000. Hatching a bright business idea is one thing, but finding the funding to bring it to life is another matter altogether.
The reality is, money is a key ingredient in the recipe for startup success, and financing is a critical component in getting your business off the ground. Securing small business startup funding can be especially challenging and may simply feel out of reach due to the restrictive requirements of traditional business loans.
Don’t let that put a damper on your business plans. While finding the funds to nurture your startup can be tricky and trying at times, it’s not a lost cause — in fact, far from it. There are still plenty of great startup business loans and other ’money trees’ for you to explore. To help you better navigate them, we’ve prepared a breakdown of the best funding options for beginners.
Free money to start a business? Sounds like a dream come true or, possibly, just too good to be true. Fortunately, business grants are not a myth, and a number of government-backed and private grant options exist for startup businesses.
There are some potential drawbacks, however. Given their very nature, grants are a competitive option. The application process is sometimes lengthy and labor intensive, and there are rigid rules around how funds are used.
There are a variety of grant funding options for you to explore online, including, for example, federal grants, and others such as the Small Business Innovation Research program, or the Small Business Technology Transfer program.
Small Business Administration (SBA) loans
The SBA partners with lenders to provide loans to startups and small businesses. Rather than lending directly, the SBA guarantees a percentage of the loan, which helps startup businesses obtain loans with desirable rates and terms that are otherwise extremely rare for a new business.
The SBA microloan program partners with nonprofit, community-based lenders to provide startup loans of up to $50,000.
You will likely enjoy face-to-face interaction in the form of mentorship, which is a key advantage of SBA microloans. Typically, microloan providers will pair you with other startup founders who can offer advice on a range of topics; for example, finance, business strategy, marketing, and more.
It’s worth noting that mentored startups raise seven times more money than their independent counterparts.
Explore all SBA loan options and resources here.
Startup business loans
A startup business loan is a financing option created to help cover the costs associated with starting a new business. Typically, these funds can be leveraged for supplies, working capital, equipment, real estate, inventory, machinery, and more.
One drawback to consider is that there are usually many hoops to jump through to qualify for loans from traditional lenders. Strict eligibility requirements and rigid terms mean these loans are often outside the realm of possibility for early stage startups.
Business lines of credit
A business line of credit provides access to revolving capital, similar to a credit card.
They are often used to cover short-term financial needs, which can include everything from inventory purchases to product development. One key advantage of a business line of credit is that interest is only charged on the amount spent rather than the full credit limit. As with loans, business lines of credit from banks have rigid requirements for startups.
Equipment financing is generally a more cost-effective option for startups that are seeking out funds with the specific intent of purchasing the physical equipment needed to run their businesses. This type of financing excludes real estate but instead applies to physical assets such as machinery, computers, servers, vehicles, and similar equipment.
Once the loan is approved, the equipment you purchase then serves as collateral for the lender. This means that the lender can repossess the asset if the loan defaults for non-payment. Equipment financiers generally cover a percentage of the equipment, or even the full cost, and in some cases pay out the loan amount directly to the equipment vendor(s).
If equipment financing sounds like a fit for your business, you may want to check out equipment financing companies such as eLease for more information.
An angel investor is typically a high-net-worth individual who funds startups needing access to funding in the early stages of growth. They invest their own money in your business, usually in exchange for a percentage of ownership. This means there’s little risk and no loan to repay if the business fails; instead, if your business succeeds your angel investor takes a share of company profits.
Angel investors are often successful entrepreneurs with extensive startup experience. This added mentorship can be extremely valuable and helpful in shaping the long-term success of a business. However, unless extremely lucky, finding an angel investor isn’t a quick process. It can take multiple time-consuming concept pitches and rejections, and even then, doesn’t always pan out.
If you’re considering an angel investor as an avenue for funding, it may be beneficial to brush up your knowledge of the process and learn how to perfect your pitch. Here are some helpful resources to get you started:
Venture Capitalists (VCs)
Unlike angel investors, who invest their own money, a VC is an outside group that raises capital from limited partners and takes shares of the startup in exchange for funding. Percentages of ownership are negotiable and are usually based on a company’s valuation.
The benefits of a VC are not all financial. Similar to angel investors, VCs can provide an abundance of knowledge, industry connections, and business direction. But the chances of receiving VC funding are quite slim for brand new startups. VCs seek businesses with a rare combination of product and market opportunity that are likely to increase in value rapidly.
If you’re interested in obtaining VC backing, check out How Venture Capitalists Make Decisions for more information.
Crowdfunding is a form of startup funding that doesn’t require a business to fulfill the qualifications that a traditional lender will insist upon.
You can offer equity to attract investors through a crowdfunding platform, so application forms, credit scores, collateral, and similar requirements of traditional lenders are not needed. Crowdfunding is a financing option best suited to startup businesses raising smaller sums.
If you’re interested in exploring crowdfunding as a financing option for your startup, there are multiple platforms to consider. Some of the top crowdfunding platforms include Kickstarter, Indiegogo, and Fundable.
Fast funding for your growing business
As an entrepreneur, you’re the only one who knows your goals — and your timetable.
If you’re willing to give up equity and have time to invest in the search for grant funding, crowdfunding, or investor pitches, then it could make sense to explore those options further.
On the other hand, if you’re looking to level up your already growing business, you could be better off applying for a business line of credit or term loan. If approved, you’ll have quick access to the money you need to move forward.
Seeking fast and flexible financing for your growing business? Apply today to see if you qualify for a business line of credit or term loan from Fundbox.
Disclaimer: Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
Fundbox makes capital available to businesses through business loans and lines of credit made by First Electronic Bank, a Utah chartered Industrial Bank, member FDIC, in addition to invoice-clearing advances, business loans and lines of credit made directly by Fundbox.