Securing funding is one of the most important and fundamental steps a small business owner must take to start and maintain a business. Although there are a variety of options, small business owners often struggle to find sufficient funding for their company because investors are less willing to give much-needed financing to small companies with a limited credit history, especially if their business venture is just beginning.
Here are a few of the most common funding options available for new and small businesses:
Personal investment
This aspect is one of the most common funding options, personal investment occurs when small business owners use their personal savings or assets to fund their business. Although this means of funding is often readily available, personal investment can be an undesirable funding option because of the extreme risk it poses for the business owners, who put their personal and financial well-being on the line.
Factoring
Factoring provides businesses with immediate financing regardless of a businesses’ credit ceiling. This makes factoring a helpful option for businesses too new for traditional financing, companies experiencing sudden growth and companies who need additional capital to take advantage of immediate opportunities. In fact, Mōmentum Capital Funding closes deals within 24 hours and provides funding of 75 to 90 percent of the total amount of a company’s invoice with credit lines ranging from $20,000 to $5,000,000 and no monthly minimums.
For the factoring process, a business sells the factoring company an invoice. The factoring company gives the small business an advance of the percentage of the invoice and saves the rest in reserve. When the invoice is paid, the factoring company subtracts their fee and gives the rest of the reserve money back to the business. Learn more about the benefits of using MCF’s factoring service.
Commercial loans
Banks and credit unions provide commercial loans for small businesses, providing cash to owners when the loan is closing. The business owner must then pay the money back to the bank or credit union with interest over a period of time. Typically, collateral must be given for the loan, but this can be difficult for small businesses and especially problematic for new businesses to provide if they have insufficient revenue or credit history. Personal guarantees are also often required, meaning small business owners must pay the loan from their personal assets if the business is unable to pay the loan.
Community banks
Community bank loans are a popular option because many offer low-interest rates and small banks often have higher approval rates than large banks. Although this is an attractive option, community banks often reject small business loans, particularly new companies.
Angel investor
Angel investors are always looking for the next big idea to finance. They typically invest anywhere from $25,000 to $100,000 in a given company, although some are willing to invest more. Finding angel investors can be somewhat tricky, as angel investing poses a number of risks for the investor. That said, there are a number of ways companies can find an angel investor, including AngelList and angel investor networks in your local area. Crowdfunding sites like Kickstarter and Indiegogo can also help you network with others interested in financing your business.
Government programs
A number of government programs exist to help fund small new and expanding businesses on the federal, state and local level, with the Small Business Administration (SBA) being the largest federal funding source for small businesses. Although SBA directly issues SBA loans, the majority of SBA loans are administered by commercial lenders and the commercial loan is then guaranteed by the federal government, which allows commercial lenders to give loans to small businesses that may not qualify under a private loan program. Researching what government financing programs are available in your state or city can be fruitful for small or new business owners.