How to get Small Business Funding for Startups

Are you looking for small business funding for a startup or a business loan? Small business funding is supposed to help your business with working capital, purchase of equipment, machinery, supplies, inventory, furniture, and the purchase or construction of real estate.

Most start up business owners can also consider getting start up business funding through business credit cards, grants, venture capital, angel investors, and crowd funding. The biggest challenge a startup or small business owner usually encounters is getting necessary funding to support their initial stages of business growth.

A small business startup loan can help you though, your chances of getting a loan approval is quite slim. There are pros and cons to small business loans and if you have bad credit or no collateral, your chances of getting a small business loan from traditional lenders or through the SBA loan program diminish even further.

How do you apply for startup business loans?

A good place to start is to have a good credit score and not a bad credit which shows the credit worthiness of your business. How is your small business cash flow? How long have you been in business? Is your business plan recently updated? How much can you budget for monthly repayments if you get a loan approval?

Are you prepared to offer collateral or a personal loan guarantee? You need to know all this before you even consider approaching any lender for a loan. What type of startup funding are you looking for? What is the lender looking for?

You will need to identify which type of startup funding you would go for and the lender you prefer. Due diligence is a necessity which can save you time and resources.

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10. FAQ

Why are banks the most likely source of financing for small business?

Small business owners borrow loans from banks using collateral such as home equity and or business assets. Banks usually prefer to make loans to small businesses that have been in operation for a few years and have enough stability and assets to serve as collateral for the loan. The amount of loan given to a small business usually depends on how much is in the business inventory and in accounts receivable. The government prevents banks from taking depositors savings and investing in risky business ventures. This makes startup businesses less likely to get loans from banks due to no collateral and or owners with bad credit. If you are looking for a startup business loan with bad credit or no collateral, you should not go to a bank and ask for funding since banks don’t finance business startups.

Why do startups need funding?

Startups like most healthy businesses need financing at some point. Most startup businesses have starting costs and expenses that arise depending on the specifics of the business. As a startup business, you should tailor your financing quest and approach to suit your kind of business and not waste time and resources looking for the wrong kind of funding. Funding for a startup will normally depend on its stage of growth, available resources, market opportunities, team, and other factors.

How do startup companies get funding?

If you are wondering how to get startup business funding, how to finance a startup business, and or where to look for money for your small business, below are a few suggestions;

Equipment Financing

Equipment funding is designed to pay for the purchase of startup and or small business equipment and machinery. Equipment loans have monthly repayment terms and long repayment period and are similar in structure to a conventional loans, with monthly repayment terms over a long period. However, start up business loans for equipment can only be used to purchase equipment or machinery since your equipment will be used as collateral for the loan.

Business Credit Cards

Business credit cards can be a great alternative source of funding for a small business startup, and can help establish a business line of credit. To qualify for a business credit card, lenders will look at your personal credit scores and income both personal and for the business. Even though a collateral is not necessary, some lenders may ask for a personal loan guarantee. Most business credit cards have bonus rewards programs and sign-up bonuses. A good tip would be to select a business credit card with a 0% introductory funding offer to allow you to make purchases and carry a balance for 9, 12, or even 15 months without paying interest when you start your small business.

Startup Consultants

Startup consultants usually charge a premium to connect your startup business to funding. They can also check the viability of your startup business for funding and make sure you are covered with all the basic startup business needs, from business plan creation, business insurance, and a business plan.

Venture capital

Though quite rare, venture capital funding for startup or small businesses are only available to a select group of high growth startups. Venture capital is a business like any other and they usually prefer startup businesses with proven market opportunities, high revenue and growth potential in order to get returns for their investments pending an IPO or exit option.

Bank Loans

Most banks and or commercial lenders usually prefer to offer loans to small businesses that have collateral and no bad credit. Banks do not fund startups since government regulations prevent them from taking and risking depositors hard earned money in unproven risky startup businesses. To get startup business loans from a bank, you need to have a solid collateral, good credit history both personal and for the business, and a business plan in addition to other required documentations.

Angel Investors

Angel investors are the most common source of funding for startup businesses especially during the earlier stage of growth. Be careful when dealing with firms you hire to find you start up business funding and act as a front or negotiator for you, or prepare your business plan, and to pitch your presentations since real angel investors prefer to deal directly with startup business owners seeking funding for their business.

Crowd Funding

Crowd funding is an accepted term for individual investment in startup business by non 'accredited investors' who do not meet the U.S securities and exchange regulations, pertaining to legal wealth requirements. Online crowd funding platforms can be a great source of business funding for startup. Startups and even small businesses can solicit for funding from a wider range of investors. When in doubt, double check with your lawyer first.

The Small Business Administration (SBA)

The SBA usually offer loan guarantees to small businesses and even startups. Though the SBA does not give loans directly, it offers loan guarantees to approved SBA lenders thereby making it easier for small businesses to get business loans. The SBA will normally require startup owners seeking microloans to have at least a third of the required loan amount and reasonable personal and or business asset guarantees, to get a startup business loan approval. The SBA works with certified lenders through its program and you should make an inquiry or search online to see if your local lender or bank is approved by the SBA to offer loans.

Alternative lenders

Apart from bank loans, established small businesses can access funding against the business account receivables. Invoice factoring or purchase order financing can be a great source of funding for small businesses mainly to support cash flow, though, interest rates and fees may be relatively high.

Friends and family funding

You should know how much funding you need for your startup or small business, the risks involved, and how much you can afford to lose before you ask for funding from friends and family. Small businesses and startups do fail and you should make them understand that before you ask for donations.

Other Micro Lenders

Apart from the SBA, there are other micro lenders and non-profit organizations that offer small business funding of less than US$35,000. You can search online for online business loans for startups.

Personal Credit Cards

A personal credit card with a reasonably high limit can help you fund your small business especially if you cannot get a business credit card. Keep a close eye on your credit limit and pay your bills on time, since making business expenses on personal credit cards can ruin your personal credit.

Savings/Home Equity

If you have enough savings, you could use it to fund your small or startup business or even get a loan using your home as a collateral.

401K/ IRA Savings

If you plan to incorporate your small business, you can use your retirement savings plan to fund the company. Keep in mind not to use all your retirement savings on the startup business.

Can you get an SBA loan to start a business?

The SBA also offers microloans up to $50,000 which can be used for working capital or the purchase of inventory or supplies, machinery or equipment, or fixtures and furniture for a startup or small business. Government-backed SBA loans tend to pose a lower risk to lenders than traditional funding. Startups who may be struggling financially, can consider applying for grants for small business owners and small business startup loans, such as an SBA loan.

The SBA works with various lenders and organizations that can help provide funding to eligible small businesses. They also offer research and development grants for businesses that might benefit from such resources. Individuals can also apply for SBA microloans from non-profits or local organizations that offer additional funding to minority community members looking to start a business. These short term small business loans can be useful and provide easy access to funding for persons who are disproportionately disadvantaged.

The SBA microloans program was originally set up to make startup business funding more readily accessible to women, mom and pop businesses, minorities, and veterans. The U.S. Small Business Administration’s SBA microloan program partners with community-based, nonprofit, intermediary lenders to provide small businesses with loan amounts between $500 up to $50,000.

The SBA microloan interest rates usually range between 8% to 13%, and term lengths do not exceed 6 years. SBA approved microloan lenders act not only as a source of funding for a small business startup, but also as business mentors offering advice on business management, marketing, and finance for the ongoing success of the startup and small businesses.

The application and approval processes for the SBA microloan program is usually quite long and difficult due to the program's requirements. However, if you have trouble getting a small business loan, you should consider SBA guaranteed loans. Some of the SBA programs include;

Small Business Investment Company (SBIC)

SBICs are privately owned and managed investment funds that use their own capital, plus funds borrowed with an SBA guarantee, to make equity and debt investments in qualifying small businesses.

Small Business Innovation Research (SBIR) program

SBIR program is for small businesses that engage in federal research and development that has the potential for commercialization.

Small Business Technology Transfer (STTR) program

The STTR program offers funding opportunities for small businesses in the federal innovation research and development field. Small businesses who qualify for this program work with nonprofit research institutions in the early and intermediate stages of their startup phase.

Can I get a grant to open my own business?

If your small business does not qualify to get a loan, consider startup business grants. Grants are usually granted by certain organization or individuals for promotion of a dedicated cause especially for startups specializing in niche industries in an underprivileged location. Grants for small business are a type of startup funding that usually requires no repayment and no exchange of equity. Although difficult to access, small business grants are a good source of startup funding for small business.

They are usually industry-specific so you will need to carefully research your business industry, identify your niche, and adjust your grant application to align with the grant sponsor’s goals. There are also small business grants for women, veterans and minority owned businesses. Governments and private enterprises also offer grants to small businesses and even though qualifying for a grant to fund your business is hard, getting one could as well be worth it.

What is the role of a business plan when applying for business funding for startups?

A well-written and structured business plan and pitch, presents your startup business to investors in detail. Though, nobody invests in ideas or plans, your business plan is an essential piece of the startup small business funding process, explaining exactly how much money you need, where you plan to spend the money, and how long it will take your business to get returns.

Most investors , commercial banks, and the SBA, require a business plan as part of the startup business loans application. Investors will look at your summary, pitch, and eventually a business plan as part of the due diligence process or during the early stages of your business. Everyone you start a business funding talk with is going to expect you to have a business plan. Just make sure to have a business plan ready and available for when they ask you for it.

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