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10 small business funding options — from angel investment to traditional loans

by Geoff Scott

his article was originally published on Sept. 30, 2019, and updated on Feb. 26, 2021.

Often, all it takes is a little money to get the ball rolling for a young (or new) company. But what options are out there to acquire the necessary small business funding that a startup needs to put things in motion and actually begin growing?

Fully understanding the choices available — as well as the process of how to raise capital — are the factors that set many successful young businesses apart from their counterparts.

And while these startup funding options aren’t always intuitive, it only takes a bit of effort to absorb and understand them.

Small business funding guide This comprehensive guide was created to act as that bit of effort. It aims to help entrepreneurs and small business owners get up to speed on myriad funding options for new and fledgling ventures.

Before we dive into the specific small business funding options, though, we’re going to take a close look at 5 recommended preliminary steps to take prior to exerting energy raising capital (because everyone has to start from somewhere).

Then, we’ll take a deep dive into 10 small business funding strategies (with pros and cons of each) to help you better understand the choices at your disposal, so you can get the financing needed to succeed.

  1. Bootstrapping and personal loans.

  2. Crowdfunding.

  3. Small business financing via angel investment.

  4. Equity fundraising.

  5. SBA loans.

  6. Other types of small business and startup loans.

  7. Small business grants.

  8. Business credit cards.

  9. Business credit lines.

  10. Equipment financing.

We’ll round out this guide with some additional startup and small business funding options to consider.

Ready? Let’s make it rain!

Editor’s note: This content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Preparing to raise capital: 5 key steps Raising money may feel like a daunting prospect if you’ve never done so before, but it’s a process that becomes less intimidating with a bit of preparation. Follow these five steps, and you’ll be in good shape when it comes time to meet with banks, investors and other potential contributors of small business funding.

Solidify your business plan If you’re an established business owner, you already understand the value of a fine-tuned business plan. But if you’re new to the entrepreneurial game or creating your first startup, it’s important to not overlook this key step in the small business funding process.

While viable business plans are comprised of numerous components, there are certain ones that are more critical than others. To create a business plan compelling enough to inspire startup funding, make sure you hash out these four key elements:

Element 1: Your value proposition If you’re to have any hope of rounding up startup funding from investors, you need to have a well-thought-out value proposition. Understanding what your product or service brings to the table and being able to clearly explain this to others is essential.

If you’ve made it to this stage, you likely have a good idea of what this value element is. But have you explained it in writing before? Have you given anyone the “elevator speech” — the abridged version of what value you’re bringing to the market with your startup? Element 2: Customer segments and relationships Unless you’re pitching the next Google-type product, there’s a good chance you won’t be marketing your business to everyone (if you are, best of luck). Since you’ve already hashed out a sound value proposition, you should have a rough idea of what segment of the population might be interested in your product.

Do your research ahead of time, so you have some concrete, quantifiable data to share here.

Writing out your target demographic — including details like projected age range, gender, geographic location, education level, etc. — will help investors assess whether the potential is there or not for your business.

You also want to highlight how you plan to interact with this demographic, because this will (ideally) reflect a better understanding of your audience as well as your ability to connect with them. Element 3: Revenue streams What’s your strategy for making money? It’s possible you have several in mind. For instance, maybe you intend on facilitating in-person sales, online credit card processing and even recurring ACH billing for a membership program you have in place.

Make your methods exceedingly clear in your plan. Note that if you’re planning on opening a business considered risky by banks, you’ll need to work on opening a high-risk merchant account to ensure your revenue continues to actually keep streaming into your coffers.

It’s an encouraging sign to investors that you have your payment processing needs sorted out, and makes your ability to eventually pay them back much more apparent. Element 4: Key activities and resources Do you have any competitive advantages or ways of tapping into your industry’s market that set you apart from other businesses? Maybe you plan on simply doing something in a more efficient way than your competitors.

Such details will play a large role in how much your business plan resonates with interested listeners.

Also bring to light what resources you currently have to work with and how they can be wielded to help your customers. Things like human resources, additional capital, intellectual property — these details are valuable, and give your business plan some weight.

If you’re starting from scratch here, that’s OK, but having some type of resource to leverage makes your business instantly more compelling.

Lastly, it’s important to remember that while a business plan is crucial for small business financing and startup funding efforts, it holds more value than just that. Specifically, it acts as a guide that you can constantly turn to during those less stable early stages, plus it can help you in day-to-day operations.

Bonus resource: Slideshop Seed Fundraising presentation deck Slideshop’s Seed Fundraising presentation deck can help you tell your story and excite your investors. It even includes animation to grab your investors’ attention.

Available with a subscription, the PowerPoint template includes slides that will help you convey the following:

  • Your team

  • Your advisors

  • Company overview

  • The opportunity

  • The market size

  • Competitor analysis

  • High-level financials

Slideshop’s premium content also comes with a complimentary “Designer Pro Tips” slide to help you get the most out of this presentation template. Know your numbers Some founders shy away from the financials, and put most of their energy into their product or service. While that enthusiasm and passion is ultimately what drives them to run their own business, none of it is possible without a solid understanding of the books.

Even if you decide to separate yourself a bit from the financial side and outsource your funding efforts, you should still learn how to read the statements and projections.

Potential lenders and/or investors will expect a clear explanation of your venture’s key metrics (e.g. gross margin, net income, cash requirements, monthly burn rate), use of proceeds, growth projections and, in the case of investors, their estimated ROI.

Numbers are the key to making a compelling case for your business. Without them your chances of acquiring the small business funding necessary to thrive will greatly diminish. Begin to build business credit When you first enter the entrepreneurial world, you soon realize that personal credit can only get you so far as an owner, and that building business credit is imperative to your long-term success. Taking time to build business credit during the early stages of your startup means that you’re setting yourself up to get approved for the loans needed to expand later.

And while this step is a gradual one, over time it will solidify your financial standing with banks and investors, as well as establish your business as a trustworthy organization to work with.

Plus, as you build business credit your interest rate for loans will gradually decrease. By understanding how business credit works, you can put your business in a better position financially.

The four credit bureaus for businesses There are four credit bureaus that assign business credit scores:

  • FICO assigns a Small Business Scoring Service (SBSS) score from 0 to 300.

  • Dun & Bradstreet assigns a PAYDEX score from 0 to 100.

  • Equifax assigns three scores: a payment index from 0 to 100’ a credit risk score from 101 to 992’ and a business failure score from 1,000 to 1,880.

  • Experian assigns a business credit score from 0 to 100.

If you’re in the market for a business loan, the FICO SBSS score is popular with banks for pre-screening, and most require a minimum score of 160. Without any business credit history, the highest possible score is 140, so you can’t rely on great personal credit to obtain a loan.

But remember, lenders could choose to pull any of your business credit scores, so it’s in your best interest to work on all four of them.

How business credit scores are calculated may be complicated, but building your business’s credit doesn’t need to be.

Follow these strategies to help collectively build business credit across all four bureaus.

Strategy 1: Set up an LLC or corporation You can only build business credit if your business is legally a separate entity from yourself, meaning you’ll have to establish an LLC or a corporation.

While it’s easiest to form an LLC or incorporate your business in your home state, some business owners choose to do so in another state with more favorable business laws for their particular business model.

To further establish your business as a distinct entity and not a sole proprietorship, consider putting together an LLC operating agreement. It’s not required in most states, but having one looks good to investors and creates operational parameters in the event of disputes.

Strategy 2: Make payments on time Every credit bureau uses your business’s payment history as a factor in determining its credit score. Needless to say you shouldn’t miss or postpone paying your bills, or else all that energy you spent to build business credit will largely be wasted.

If you needed further incentive: Dun & Bradstreet bases its PAYDEX score entirely on payment history, and to get a 100 (their highest score), you’ll need to make payments 30 days in advance of the due date. If that’s too much of a challenge for your particular enterprise, paying on the actual due date results in a score of 80, which still falls in the bureau’s low-risk range.

Strategy 3: Keep your credit utilization below 30 percent Equifax, Experian and FICO all use credit utilization as a factor in calculating business credit scores, so it’s another factor worth monitoring and addressing.

Credit utilization is the amount of debt your business has compared to the amount of credit it has available. However, what credit bureaus weigh most heavily are balances on revolving lines of credit. Let’s say that you have multiple business credit cards, and their credit limits add up to cumulative $50,000. If your total spending amounts to $10,000, your credit utilization is at 20 percent.

To effectively build business credit, it’s essential to keep your utilization down.

Strategy 4: Track your credit with each bureau Unfortunately, free credit reports are a consumer luxury rather than an entrepreneurial one. However, purchasing them through each credit bureau for your business once or twice a year is still a worthwhile investment. Doing so allows you to check your various scores and check for errors.

You might also discover that your business’s credit history is missing information about payments to certain suppliers and lenders. Not every company reports payment information to the credit bureaus. If some of your payments aren’t reflected in your business credit report, you can contact these particular companies and request that they start reporting them. Establish or strengthen your business’s online presence Whether you’re running a small mom-and-pop bakery or are aiming to take the world by storm with a revolutionary SaaS platform, you’ll want to have a well-curated online presence. At the time of writing this piece, there were nearly 4.2 billion internet users across the globe. Not using this to your advantage is a big mistake.

You don’t need to run a monster website to receive small business financing, but there are several actions you can take that will increase your chances of impressing lenders and getting the cash you need. Get a professional domain A business without a legitimate domain name tied to it does not look great to prospective investors.

Thankfully, this is something that is easily rectified — all you need to do is research available domain names, and buy one that falls within your budget and makes sense from a branding standpoint.

Go ahead — give it a try: Purchase email addresses for that domain Domain registrars often provide packages where you can get professional email addresses that include the domain name. This is a smart idea for several reasons. In terms of startup funding, a business email is simply more authoritative than a generic email account.

Your professional email shows that you’re serious. Additionally, this type of email address is more likely to stick in the mind of an investor and customer. At the very least, you want your email address to make an impression when communicating with anyone contemplating an investment in your company. Create a website You can bet that potential investors, like potential customers, will search for your business online. Having a professional-looking website will likely give you a leg-up in securing small business financing.

And it doesn’t require a big investment of time or money.

Sure, having a highly customized website that covers all the online needs of your business is the dream, but early on, a simple website that covers all the basics will suffice.

You can use an easy DIY website builder to create an effective, professional-looking website in under an hour.

GoDaddy’s Website Builder makes it a snap to create a beautiful business website.Related: How to start a website from A to Z Do your research If you really want to know how to raise capital effectively, it will take time and research. You might already have some great leads on investors and are feeling optimistic, but keep deep-diving into competitor analysis, hashing out your business plan further, and learning more about the unique angles and resources available to your particular business.

For instance, if you’re a female entrepreneur, there are some excellent business loans for women that you can explore. Likewise, a number of venture capital firms specialize in startup funding for female founders.

Look into angel investors and fundraising organizations in your city, because many such individuals and groups prefer to support local startups.

Taking every angle when approaching the startup funding process will increase your chances of finding suitable contributors.

Of course, the internet hosts plenty of information about small business funding opportunities — even providing them in the form of online platforms that exist solely to source capital.

Finally, doing your due diligence will help assure you’re actually pitching to the right people (i.e. interested ones who share your values). For instance, if you found an opportunity presenting your ideas for a SaaS company to a group only interested in medical technologies, it would be a waste of your time (and theirs).

Investors who have a track record working within your specific industry or at least profess a strong interest in your business model will help you get the startup funding you need.

Be sure to research the investment portfolio and culture of each group you’re appealing to, and then try to find a champion or mentor within that group who seems well-suited to fighting the good fight in the name of your startup. How to raise capital: 10 small business funding options There are many ways for industrious entrepreneurs to procure the small business financing they need these days — but which way is the best? The answer is not so simple, and each way comes with pros and cons that you’ll need to consider before going all in on one (or several).

These 10 small business funding options provide an overview of the main choices out there, and give you an idea of how to raise capital successfully.

1. Bootstrapping and personal loans Bootstrapping Originating from the expression “pulling yourself up by your bootstraps,” bootstrapping involves financing your business entirely with your own money. You’ll start out using your savings, and once you’re earning a profit, you can reinvest that money into your business.

Pros Since you’re only using your money, you avoid paying any interest. Plus, you won’t put your credit score at risk like you would with a credit card or loan. (That doesn’t mean you shouldn’t build business credit as a bootstrapper, however).

You’re also keeping ownership solely in the hands of yourself and your partners, rather than investors who might not have the same vision as you do for the future of your business. If you’re worried that others might steer your company off course, then this may be the best small business funding option available.

Cons A major drawback with bootstrapping is that your resources are simply limited — whatever you’ve got saved in the bank is all you have to work with. Exclusively bootstrapping could end up slowing down the expansion of your business, and turn what could be quick growth into a taxing slog.

Who should consider bootstrapping? Bootstrapping is the American dream, and as such provides everyone an opportunity to try and run a business their own way. If you’re a freshly minted graduate out of college with hardly a dollar to your name, though, bootstrapping is going to be much more of a grind than if you have a sizeable savings account and have accumulated various assets.

Also, if you’re not prepared to be frugal — with everything —bootstrapping might not be the best choice for you. With resources all coming from your own checkbook, you’ll need to minimize expenses at every possible turn.

Personal loans If bootstrapping 100% isn’t practical for your particular business model, you can try pairing your own finances with a personal loan. As an aspiring startup, your financial history is likely limited, making the process of getting a business loan more difficult. But you can get a personal loan to help inject some cash into your company’s development.

Pros Your business won’t be considered in your loan application, so if you’ve built a strong credit history over the course of your life, you’ll be in good shape to get a personal loan. Interest rates for those with excellent credit ratings average around 10%-12%, but could be even lower depending on the lender.

Cons If your credit history isn’t respectable, you probably won’t qualify, and even then the rate might be too extreme (upwards of 30%).

Also, the amount you can borrow is much more limited in comparison with a standard business loan, unless you’re already exceptionally wealthy with a pristine credit report. If you’re looking for a six-figure lump sum to kickstart your business, a personal loan isn’t going to get you there.

Who qualifies? To qualify for personal loans that have competitive rates, you’ll ideally want good or excellent credit, which requires a FICO score of 690+. And just because you qualify doesn’t mean you’ll want to take the loan at the rate offered. 2. Crowdfunding If your personal bank statements are looking a bit lean and you’re struggling to qualify for various types of loans, hope is not necessarily lost.

One interesting small business funding strategy that has exploded in popularity recently could be your ticket to business growth. Are you ready to give crowdfunding a try?

While many people think of crowdfunding platforms as places where you go to cover the cost of a family member’s surgery or help support a friend’s dream of building homes in impoverished countries, they can also be excellent places to attract startup funding.

With crowdfunding, you’re essentially asking the public to fund small pieces of your business in return for discounts, material goods/products and other established perks.

Pros Crowdfunding is a great way to create hype in the early stages of a business, and it also helps you gauge the demographics who may be interested (or not) in your product or services. Not to mention, in the event that your campaign fails to reach its desired goal, there’s a lot less to lose than if you have to default on a loan.

Cons Your business ideas could get poached if you haven’t taken the proper measures to legally safeguard them through patents and registered trademarks. You have to go into the process prepared, or else you might get burned.

Who is most suited for crowdfunding?

If you have a business idea and can’t seem to qualify for startup funding, you might want to give crowdfunding a shot. Also, if you’re an effective navigator of the internet and know how to drum up supporters through social media and other consumer channels, it could be a great solution for you. 3. Small busines