Five common ways to fund a small business beyond personal savings

One of the most cliched statements about starting a small business is that “it takes money to make money”…but it’s often true. Many companies need a cash injection to buy essential components of their business. For a pizzeria, that might be an industrial oven, and for a garden maintenance business, that might be a commercial lawnmower.

A common funding practice for many new business owners is to use personal savings and start small, reinvesting profits into the business. Known as bootstrapping, this approach seems rooted in common sense, but it can limit the growth of your business and your personal finances. If your business needs a large capital injection, you don’t necessarily have to do it alone, and you shouldn’t do it if it jeopardizes your financial security.

There are a number of sources of funding for new and established businesses beyond your personal savings. Here are the five most common.

1. Banks and credit unions

As with your home and car, you can finance your business with loans from banks and credit unions. The positive aspect of bank financing is that you can access large amounts of money and build your business credit. One challenge is that the process can be lengthy and difficult as most lenders want to see a detailed business plan and may expect a personal guarantee or security.

2. Loans guaranteed by the Small Business Administration

Another challenge for banks is that they are often reluctant to lend to new businesses. Fortunately, the Small Business Administration (SBA) works with lenders to guarantee loans to budding entrepreneurs to improve access to capital by reducing the associated risk for the lender. They also have lower interest rates, but the approval time can be lengthy.

3. Mission-driven lenders

If you can’t get a traditional bank or SBA guaranteed loan, another option is an order lender. These types of lenders include Community Development Financial Institutions (CDFIs) and work with entrepreneurs by providing hands-on guidance from initial application to loan life. While loan amounts tend to be smaller than those available from banks, many entrepreneurs find the mentoring of on-call lenders invaluable.

4. Online Lenders

Another option that has grown significantly in recent years is online lending. They come in a few different forms. One is private companies like Square and PayPal, which issue loans either as part of their larger offerings or as companies dedicated entirely to online lending. Additionally, most financial institutions, including traditional banks, SBA-backed lenders, and CDFIs, offer online lending options. In both cases, the application process and approval times are often quicker and more convenient. However, many non-bank online lenders charge higher interest rates or heavy penalties and fees. Therefore, be sure to find out about the repayment terms before you take out a loan.

5. Crowdfunding

Another funding source you may have seen that filmmakers are using to go green with their projects is crowdfunding, and it can potentially work for your business as well. Crowdfunding involves asking a large number of people to fund your business, usually through small donations, and receiving a small gift such as a branded item in lieu of monetary consideration. Most crowdfunding platforms are low-risk as they don’t require business owners to return the money to the donors. The only downside is that putting together a crowdfunding campaign is also time-consuming, so it’s important to make sure it’s a good fit for your business.

Whether you’re using personal savings or a crowdfunding campaign, there are many ways to fund your business. The most important factor in your selection is determining which one is best for your financial security, business growth, and mental health.

About Gloria Skelton

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