How to Finance Your Business 101: The Complete Guide to Your Small Business Funding Options

If you’re reading this post, there are two things that I already know about you.

First, you’re either a small business owner or aspiring to become one.

How do I know?

Well, that’s because 99.9% of businesses in the US are classified as small businesses. That means your business has 500 employees or less.

Second, I know that you’re looking to find ways on how to finance your business, especially in these uncertain times.

Getting sufficient funding to start and grow a business is one of the biggest challenges small business owners face. It is also one of the reasons why many small businesses fail.

One study shows that up to 29% of the businesses that don’t survive the first five years. This is because of a lack of small business funding and adequate cash flow.

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And if you think that’s bad, try being a Black small business owner.

In an article published by the Guardian, less than 47% of the applications filed by Black business owners for small business funding options get approved.

Ironically, before you can show concrete evidence that your business is profitable, you first need to have money to get it off the ground.

In this guide, I’ll share with you eight ways how to finance your business. These are the common options used by entrepreneurs to get the capital to start and grow your business.

The best part? You don’t have to be a Black small business owner or startup founder to benefit from this.

Before we go any further, I want to give you this disclaimer

The information I’m sharing here is based on what I’ve learned while finding a way to fund my own business.

I’m not a financial consultant. I don’t want to give you the impression that I’m an expert.

Common misconceptions about small business funding options

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Misconception #1: You got to have a business first before you can qualify for small business funding.

You’ll indeed have a better chance of securing a loan if you already got a business up and running. But it doesn’t have to be a prerequisite, especially if you’re planning to put up a sole proprietorship business.

Some small business funding options will allow you to take out a small business loan even if you’re just starting with your business. I’ll talk about this more in detail later in this article.

Misconception #2: You need to have a stellar credit history to qualify for small business loans.

Having a pristine credit history increases the chances of your small business loan approved.

But believe it or not, it’s not a requirement.

The fact is that you can still qualify for a small business loan, even if your credit history is less than perfect. Of course, the interest rates may be higher, and the terms less flexible than if you had a stellar credit. But at least you can fund your business and get it off the ground.

Misconception #3: Small business loans take forever to get processed.

Many people looking for a quick way to finance their business in these uncertain times would be looking at every small business funding option available, except small business loans.

Why?

Because they take weeks—even months—to get processed. Right?

Well, not exactly.

Thanks to the Internet technology we have at our disposal, you can submit your small business loan application and get the funds you need to keep your business afloat in just a matter of days.

Of course, that’s assuming that you got all the documents on hand, and you’ve carefully done your research.

That said, here are some things you need to consider before you start applying for small business loans.

1. Your purpose.

Business owners take out small business loans for different reasons. It could be to start a business, getting additional capital to expand it, or to keep it afloat during times of crisis.

Knowing this will tell you how soon you’ll need the funds and how flexible the terms should be so that you can make the repayments on time.

2. The state of your business.

Some small business financing options will require you to submit documents proving that your business is financially healthy. Example of these include:

Tax documents
Bank statements
Profit and loss statements

Investing in a bookkeeping software tool like FreshBooks can help you make sure that all your business documents are organized and current.

That way, you’ll find it easy to evaluate the overall financial health of your business. It’s also going to make it easy for you to gather all the documents you need to submit to the bank or credit union.

And because Freshbooks already lists each transaction into different tax categories, you can file your taxes on time and not miss out on any tax breaks.

3. Your credit history.

While I did say that you don’t need to have a stellar credit history, it will dictate what small business funding options you can apply for.

Ideally, you need to have a credit score of at least 680 so that you can qualify for most bank loans and government lending programs.

Now, you may be wondering: Why would they check my personal credit score if I’m taking out a loan for my business?

The reason is that your personal credit score gives lenders insight on how much of a financial risk you will be if they approve your loan application. This bears even more weight if you’re applying for a loan to fund the new sole proprietorship business you’ve set up.

If you’ve got what lenders would classify as a “bad credit” score, you may want to consider fixing this up first before applying for a loan. That’s because applying for a loan—business or personal—will cause your credit score to go down even further.

Consulting with a qualified financial advisor can help you with this.

4. Your current cash flow.

Lenders expect you to make your loan repayment on time regardless of whether or not your business is already making money.

You need to make sure that you already have the funds to make your payments without putting unnecessary stress on your household finances.

For this, you can use an online loan calculator so that you can find out how much you’ll need to pay for a specific loan amount before you go and send your application.

Here are a few online calculators that you can use:

Once you have everything, it’s time to choose the method of how to finance your small business.

Here are eight of the most common small business financing options that business owners use to fund their companies.

1. Self-funding

More commonly called bootstrapping, self-funding involves using the funds you already have to start and scale your business.

Example of these includes your checking account, investments you made in the past, or inheritance coming from a family member.

Other business owners using this method to fund their business would get the funds they need by taking on freelancing gigs and other jobs on the side.

This small business funding option isn’t for the faint-hearted because this would mean longer working hours and even sacrificing time with your family or for yourself.

At the same time, it’s the most rewarding.

Bootstrapping your business means that you don’t have to worry about making loan repayments whether or not your business is already generating revenue.

And since you’re not making any payments, every sale made by your business can be considered as a profit.

2. Equity financing

As its name suggests, this small business funding option involves cashing out a portion of your business’ equity to fund your small business.

There are two types of equity financing: angel investors and venture capital firms.

Angel investors

Angel investors are individuals that are looking for “up and coming” businesses that they want to help get started.

There are several benefits you get from funding your business through the help of angel investors.

First, since angel investors are successful entrepreneurs in their own right, they not only provide you financial support but also sound, strategic advice to start and scale your business.

Second, you won’t have to worry about paying back the angel investor the same way you’d do with a small business loan.

Instead, you pay these angel investors with the percentage of the revenue generated by your business. The amount they get will depend on how much business equity you provide them.

More importantly, angel investors aren’t after becoming part-owners of your business. So even if they give their two cents in terms of your business strategy, you still have the final say on whether you’ll take their advice or not.

Venture Capitals

This was the small business funding option used by “unicorn startups” like Uber, Facebook, and Google.

Venture capitals are firms made of several investors. They pool together funds coming from various sources and use this to fund small businesses they want to support.

Just like angel investors, venture capital firms give you more than a way how to finance your business. Many of these venture capital firms have their own startup accelerator programs that’ll provide the resources you need to launch and scale quickly.

At the same time, you’re mentored by successful entrepreneurs from your industry.

There’s one catch if you choose this small business funding option, and it’s quite a big one.

Unlike angel investors that are content with receiving a return on their initial investment, many venture capital firms expect to have a seat in your company’s Board of Directors.

Because of this, they’ll now take an active role in every decision you’ll make for your company.

It’s also because of this that they’re more selective on the types of businesses they financially support. For instance, some venture capital firms will fund SaaS startups that generate at least $1 million annual recurring revenue (ARR).

3. Financing from family and friends.

Another way to finance your business is to reach out to family and close friends with the financial means to fund your business venture.

The way how your family and close friends would help fund your business greatly differs.

Some would fund your business in the same way as angel investors—silent partners who’ll be happy to get a return on their investment.

Others would resemble venture capital firms in that they would want to become part-owners of your business.

While the rest would treat the funds that they’ll give you to finance your business as a small business loan that they expect you to pay back. Of course, the terms are less rigid, and they may not even charge you interest when you pay this back.

4. Secured small business funding options.

I said earlier that you can still get approved on small business loans even if you don’t have a stellar credit history. This is one of them.

Secured business loans are called such because they require you to include some form of collateral in your application.

An example of a secured loan is the home equity loan. Here, you use your home as your collateral.

By including collateral in your application, you’re giving the bank or credit union something they can claim and liquidate in case you default on your loan repayment.

This, in turn, lowers the financial risk of the bank or credit union you’re taking out the loan from. It’s for this very reason why secured small business funding options have the lowest interest rates.

5. Unsecured small business funding options.

As you may have guessed, these small business funding options don’t require you to declare any type of collateral.

Instead, the lender will require you to give them a personal guarantee that you’ll make the loan repayments on time.

Time is perhaps the most significant benefit you’ll from taking out an unsecured small business loan. You can get approved for an unsecured loan within the day and have the funds you need for your business in a week.

One reason why the processing time is so quick is the fact that there’s no collateral that the lender needs to appraise.

Another is that some lenders offering unsecured loans like Kabbage don’t require you to submit tons of paperwork to apply for small business loans.

However, if you’re applying for a government loan like the Paycheck Protection Program, you’ll be asked to submit the documents required to qualify for the program.

6. SBA Loans

Of the different small business funding options included in this list, this is perhaps the most popular. And next to self-funding, it’s also the most widely-used by aspiring small business owners when it comes to financing their small business.

Depending on which SBA loan type you’ll apply for and the amount you’ll be taking out, the US Small Business Administration will guarantee anywhere between 75% and 85%.

Because of this, you can get approved for a loan with considerably flexible terms and low-interest rates.

SBA loans, however, have two major flaws.

The first is the list of requirements you’ll need to meet before you can apply for an SBA loan.

In addition to proving that you have an impressive credit history, you’ll also need to personally guarantee you can repay the loans using your personal assets. Some partner lenders may even require you to declare some type of collateral if they’re not convinced.

It’s for this very reason why SBA loans have the highest rejection rate. Only 10% of business owners applying for an SBA loan get approved.

But perhaps the most frustrating part of applying for an SBA loan is the lengthy approval process.

Depending on which partner bank or lender you apply for an SBA loan, it could take weeks—even months—before you find out whether or not you’ve been approved.

7. Crowdfunding

Crowdfunding is quickly becoming one of the most popular small business financing options entrepreneurs are using today.

That’s because crowdfunding gives you more than the funds you need to get your business off the ground.

A huge benefit of using crowdfunding to finance your small business is checking if there’s a demand for your product or service.

For any aspiring entrepreneur, this information is vital. After all, nothing is more frustrating than spending a lot of time, effort, and money towards a product that won’t sell.

Brand awareness is another benefit you get from using crowdfunding to fund your business.

Using crowdfunding platforms like Kickstarter and social media channels helps you share not just what your product is, but why you’ve decided to develop it.

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This, in turn, helps you start building a relationship with them that you can nurture later on once you get the funding you need to launch your business.

The downside of using crowdfunding is that you’re not guaranteed that you’ll generate the funds you need to start, grow, and keep your business running.

8. Small business grants

Small business grants small business funds where you’re awarded money by either a private company or the government.

What sets small business grants apart from all the other small business funding options we’ve talked about so far is that this is the only one that you don’t have to pay back.

That might be music to your ears. But it’s not without its share of shortcomings.

One of these is that applying for a small business grant will require significant time and effort on your part. Much of this will be spent on you justifying why your business should be chosen from everyone else.

Second, because business owners would love to get their hands on free money to fund their business, expect that the requirements to qualify for this will be extremely stringent.

Then there’s the long wait period. Again, this should be expected because only a handful of grants will be awarded by a company or government agency each year.

So the company or government agency awarding the grants will have to go through each application to a fine-toothed comb to make sure that the business they’ve chosen is truly deserving.

How to choose the right lender

1. Review the lender’s ratings with the Better Business Bureau.

Since you’ll be submitting several documents containing sensitive information, you want to make sure that you’re dealing with a lender that you can trust.

In addition to checking the lender’s rating on the Better Business Bureau’s website, take a moment to read through the reviews left by their past and current customers.

These will give you a glimpse into what you can expect when it comes to having your loan processed.

2. Ask friends and family for recommendations.

Your family and friends can give you honest feedback and advice not only about which lender to do business with, but also what type of small business loan to get.

Some lenders may even give you some additional consideration when you mention you were recommended by one of their existing customers.

3. Test their customer support.

Another thing to consider when choosing a lending company to do business with is its customer support.

You’d want to make sure that you can easily reach the lending company’s customer support department when you need them most.

Also, make sure that the staff you speak with are friendly, courteous, and knowledgeable. The last thing you’d want is to talk or chat with a customer service representative that’s heavily relying on a script when talking to you.

Final thoughts

Finding ways on how to finance your small business doesn’t have to be complicated.

In this guide, I’ve shared with you eight different small business funding options that you can use to start and grow your business.

While they all have their merits, each one has its set of drawbacks. So before you send in your application for any of these small business loans, be sure to do your homework.

Carefully weigh the pros and cons based on your business’ current condition and your personal financial capability. Otherwise, you could find yourself struggling to make the payments.

Which of these small business funding options have you used to finance your business? Are there any other ways you’ve used that wasn’t written in this guide? Share them in the comments below.