Your Small Business Funding Options
New to the world of small business funding? Heard about a few ways to fund a business, but want to explore all your options? This complete guide attempts to cover all the major funding options and a few obscure ones too, like Rollovers for Business Startups (ROBS) and direct public offerings. This guide will get you on the road to finding the right funding option for your business.
Challenges in obtaining small business funding
Small business and franchise owners often face the unknown, but it is the entrepreneurial spirit that helps these individuals overcome each challenge as it arises. Writing a business plan, hiring employees, handling taxes, licenses and accounting … each of these are elements that a small business owner will encounter.
But the most intimidating challenge comes before any of these: finding the right financing method. Financing can seem like a mountain of “what ifs” bent on keeping you from realizing your dream of business ownership. But here at Guidant, it is our vision to increase the number of people who succeed in small business. It’s our job to help people find the financing option that will make their dreams a reality.
We’re here to help you make an informed decision between investors, friends and family, bank loans, retirement rollovers, and more — all by breaking down the fundamentals of each funding option, when it makes sense to use each one, and how to get started.
And remember, if you want to talk through these options with somebody on the phone, we’re just a call away! Until then, let’s dive into this complete guide to your small business funding options.
How much can you afford?
The common thought path
An individual’s first thought is often, “do I have enough money saved to fund my business?” A 2021 survey of small business owners across the country showed that only 10% used personal checking and savings accounts to fund their business. Is that an option for you? If not, you’re in the same boat as most of the rest of us.
The next common thought is to get a loan from a bank. Easy, right? Unfortunately, no: while SBA loans are a great funding option, only 20 – 30% of applications are accepted.
At this point, an aspiring small business owner might turn to a partner or investor who has the required cash. Again, this can be a solid option. And again, success is more frequently the exception, not the norm. After failing to find an investor, most entrepreneurs give up their dream of business ownership. They’ve run out of all the funding options they know about, so they return to the same life they attempted to leave.
Thankfully for aspiring small business owners, there are a multitude of financing options available — and we’re going to spell them out for you.
Two Common Small Business Funding Misconceptions
Entrepreneurs who are new to the business financing process typically come in with two preconceived notions, both of which are wrong. Let’s clear these up before diving into the different funding options.
Misconception 1: "Funding is all about the business."
Many entrepreneurs think they don’t need to consider financing until they decide on their business. In reality, many funding methods take into account the entrepreneur’s credit and business history. The methods that don’t often require a certain level of cash. In the end, picking the “right” business doesn’t guarantee financing. That’s why it’s important to start researching funding options early in the process.
Misconception 2: "Independent businesses and franchises are viewed differently."
Well, not quite. Many entrepreneurs also believe that there is a major difference between startups and franchises when it comes to financing. But with most debt financing options, startups and franchise locations are considered one and the same. On the other hand, some options do draw a distinction between startups and existing businesses. This is based on the likelihood of success—an existing business has already proven it can be profitable, which can make a difference with debt-based financing options.
Dos and Don’ts while searching for funding
- Organize your finances. Part of understanding what you’re qualified for is having a solid knowledge of the equity in your home, the value of your 401(k) and stock portfolio, annual income, etc. Having this information on hand will help you determine which funding options are available to you.
- Build a business plan and pitch deck. Not all funding options require a business plan, but if you are serious about starting or buying a business, take the time to create one. This will save you time when discussing the funding options that require one, and will also give you a solid working knowledge of your business. Not sure where to start? Check our e-book on How to Build a Winning Business Plan.
- Actively manage your credit. Most funding options take your credit score and history into consideration. Take the time to pay down your cards and build up your score. Remember, your credit score tells lenders how risky or safe it is to lend you money.
- Understand what you are qualified for. Some funding options rely on credit, others on savings. Step one is knowing what you can support with your personal resources and ratings.
- Give up. Wildly successful actor and producer Harrison Ford was a carpenter until his 30s. Look where he is now —universally recognized. Do not let the possible rejection during your financing search stop you from achieving your dream. There are multiple financing options available for entrepreneurs. We’ll find one for you, too.
- Take the easy route just because it’s easy. While it can be tempting to take the path of least resistance, don’t take easy money without first determining if it is the best option for you. Some easy options come with high interest rates that can destroy your cash flow. Why choose that when there are other, better options a few steps down the road?
- Accept financing before talking to a business attorney and CPA. The type of funding you take can impact the type of entity you’ll operate under. There will also be tax implications, so always check in with your trusted team of professionals to ensure you’re set up for success when you begin operating your business. It’s always best to avoid any legal or tax surprises — which is exactly what your business attorney and CPA are hired to help you do.
- Take on more debt. Whatever you do, do not make any major purchases (i.e. a new car, house, or boat) or obtain more credit cards until you have decided on how you will fund your business. If your only option for funding is one that requires healthy credit, you don’t want to have several recent credit inquiries on your record from buying a new car.
Below is a quick overview of the four categories of financing options. Feel free to skip around if you see something that catches your eye!
These funding options involve trading a piece of company ownership for the money needed to launch or buy the business. While you are giving away equity, these options also allow you to begin the business ownership journey without debt. Skip to Chapter 2: Equity Financing.
Secured Business Loan and Collateral-Based Options:
These are considered debt financing and require some sort of collateral to secure a loan. The collateral can include your house, business, or stock portfolio, and is used to decrease the risk of the lender. Skip to Chapter 3: Secured Business Loan and Collateral-Based Options.
Unsecured and Collateral-Free Loans:
These funding options involve taking on debt to finance your business, but without securing that debt with collateral. This puts less risk on you, but because they aren’t secured by collateral they typically come with a higher price tag. Skip to Chapter 4: Unsecured and Collateral-Free Loans.
So which option is the best for me?
Great question! We recommend asking yourself these seven questions when choosing small business funding. Once you know those answers, plus the comprehensive information in this guide, you’ll be able to make a more informed decision.
What we'll cover for each funding option:
As we explore the different funding options our goal is to give you a basic understanding of each. For each funding method we will answer:
What it is. The goal of this section is to give you a high-level understanding of how that funding option works.
When it makes sense to use. We’ll walk through the option’s requirements and when using it makes sense.
How to get started. If this option sounds like it works for you, we’ll take a look at the first steps and resources to help you.
Now it’s time to dive in! Keep reading to discover your small business funding options, including friends and family, angel investors, crowdfunding, SBA loans, Rollovers for Business Startups, and more.