sources of business financing

10 Sources of Small Business Financing

You have a great idea, all your friends think you should make a business out of it, even your parents are excited… now what?

How much is it going to cost you to start your dream business? And where are you going to get the money?

The truth is that there are lots of sources of business financing available, but sometimes you just need creativity. Maybe some luck too.

Many home-based, sole proprietorship businesses are started for $3,000 or less. You could probably find that much in your own savings or from friends and family. But if you need more, you are going to need a little more help.

Read on to learn 10 sources of business financing available to you.

It’s a Game of Endurance

You are going to hear “no” often. But you will never find anyone to say “YES!” unless you ask ALL the sources of business financing. So prep yourself with a business plan and do your financial homework first.

There are many more than ten sources of business funds, but this is a great list to get you started.

1. Yourself

You have already committed your savings, but what about your credit?

Many small business owners use their credit, through credit cards or loans. This can be difficult if the entrepreneur has little or no credit.

Have no fear though, there are special cards and companies that specialize in offering loans or credit to new borrowers. Find out more about these credit sources before you need to draw on them.

Be very careful about using these sources, as you could ruin your future ability to borrow, risk your home, or threaten your business. Avoid using a home equity line of credit as the risk is too high for your family.

Credit is best used to cash flow problems that are directly related to generating revenue. Once the client pays, pay the line of credit back. It’s best not to use expensive credit for startup costs that won’t generate revenue immediately.

2. Family and Friends

One common way to end a relationship is by borrowing money from a friend or relative. Everyone has the best intentions in the beginning, but anything that goes wrong affects your friendship immediately.

That said, family and friends are one of the most common sources of business financing.

Start by separating your personal relationship from your professional business relationship. Have an attorney draft a formal agreement of ownership if you are offering equity. Likewise, do the same if you are borrowing money from a friend or family member.

3. Customers

Most people wouldn’t consider customers to be sources of business financing, but they can be. Use your leverage with customers to collect prepayments. You can then use that money to finance their order.

4. Suppliers

Use supplier credit as one of your sources of business financing. Many of your suppliers give 30 to 60 days of interest-free time to pay. Explore favorable credit terms as soon as possible.

5. Small Business Administration

The Small Business Administration is one of the traditional sources of financing for entrepreneurs. The SBA works with lenders to reduce risk and help owners get loans.

They guarantee loans and provide useful business training and advice.

6. Banks

Conventional financing may be difficult for entrepreneurs to get. Traditionally banks only lend against assets. You may have to risk your personal assets or wait until your business has sizeable accounts receivable to qualify for bank lending.

7. Leasing

Much like using your suppliers’ money to fund your business, you are using your equipment manufacturer or finance company to fund your business.

Instead of you purchasing an expensive piece of equipment, the finance company purchases the equipment and leases it to you for a monthly payment. At the conclusion of the agreement, you have the right to buy the equipment, at a pre-negotiated price.

8. Crowdfunding

The most common type of crowdfunding is offering special premiums or stakes for early investment in your company. Sites like Kickstarter or Indiegogo allow you to mass pitch strangers to ask for small investments.

Other sites like Lending Club let you pitch directly to other individuals willing to loan money.

The idea behind all of these sites is to connect investors with promising companies without a middleman or brokerage in between.

9. Venture Capitalists

Capturing the interest of a venture capitalist and then providing proof of concept is an adventure. In most cases, this form of financing is time-consuming and dangerous to your equity. You might spend months perfecting and pitching your high-margin, perfectly scalable concept only to get nothing.

10. Government Grants

The headlines scream “Easy Gov’t Money!” but there are very few grant opportunities available. Unless you are part of a very specific geographical area, in a special industry or are serving a unique cause, these probably aren’t the right funds for you. Never pay anyone to get you government grants unless you have done your own homework first.

For the most part, the government offers assistance to start a business through the SBA instead of giving grants directly.

Additional Sources of Business Financing

These ten ideas are only a start. Finding funds for any small business to grow is challenging. If you are just starting out, take the time to plan out your enterprise, create realistic financial projections and perfect your pitch.

Decide if you would like equity financing, where you exchange part ownership of the company for funds or if debt financing is your preference. There are advantages and disadvantages to both.

Either way, prepare to have careful scrutiny of your existing business and personal finances. If you are going to friends and family, seek legal counsel. Always treat investors and debt holders professionally. Provide them with legal assurances to avoid relationship damage.

Of course, keep reading to learn more about starting a business. Questions and comments? Just ask below!