How to get funding for a business

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If you’re planning on starting or growing a business, securing funding is often the first step. From traditional banks to alternative online microlenders, there are options for getting the funds you need — even if you have bad credit. In this article, we deep dive into the different business funding sources available, and explain how to increase your chances of approval.

Steps to get business funding

Whether you want funding to start a business or to expand, here’s a list of steps you can take to get started:

1. Determine how much funding you need

Calculate the amount of money you need to start a business by evaluating your short- and long-term goals. Start by making a list of your expenses, including rent, equipment, inventory, marketing, hiring and operational costs. Then, prepare a detailed budget to determine the exact amount of funding you require.

2. Decide how you’ll fund your business

Businesses have two main ways to get funding: debt-based financing or zero-debt financing. Debt-based financing involves taking out a small business loan or other type of financing from a bank, credit union or online lender, which you repay with fees or interest — or both. Options include term loans, SBA loans, lines of credit, merchant cash advances, equipment financing and more.

On the other hand, zero-debt financing includes options like grants, 0% interest microloans and crowdfunding. While these won’t cost you interest, they tend to take much longer to apply for and get funded — and because they’re free, they’re usually highly competitive.

3. Secure funding

This step involves assessing your qualifications for a business loan, including your personal and business credit scores, time in business and annual revenue — as well as your ability to make a down payment or provide collateral if you’ll be using this to secure a loan.

Then, you’ll need to research and compare lenders to find the best business loan you qualify for. Once you’ve narrowed down a loan type and lender, you’ll need to apply, providing any required documentation and financial statements.

If approved, you’ll want to review your loan agreement and repayment terms carefully to make sure you understand the terms and conditions before accepting the funds. Some loans may require frequent repayments at high APRs or have prepayment penalties.

Ways to get small business funding

Business loans come in a wide range of shapes and sizes and are available from banks, credit unions and alternative online lenders and marketplaces — as well as from microlenders like Kiva and crowdfunding sites. You could also consider applying for free money in the form of a grant.

Here’s a closer look at the options:

Business funding grants

Because it’s essentially free money, grants are one of the safest ways to fund a startup. You won’t have to make any repayments or hand over partial control of your small business in exchange for funding. Grants are available from both federal and private sources, but federal funding for startups is limited, so consider applying for private grants through corporations and nonprofits.

The downside is that grants are highly competitive, time-consuming to apply for and offer a lower amount of financing than you might get with a small business loan or investor. But if you’re willing to put in the time and effort, consider these 11 grants for startups, including funding options for entrepreneurs and women and minority business owners.

Online loans and loan marketplaces

Online lenders like Bluevine and OnDeck are known for having relaxed eligibility requirements compared to banks, with options like lines of credit and term loans for credit scores as low as 625. Online lenders often accept businesses that can’t qualify for a bank loan, and they can be your best chance at getting a same-day business loan or a low-doc business loan. You may even be able to land a business loan using your EIN instead of your Social Security number.

Additionally, online marketplaces like Lendio and Lendzi can be a great place to start your search for a business loan, especially if you’re not sure where to start. Offering term loans, SBA loans, lines of credit, merchant cash advances and more — these marketplaces will match you with lenders based on your credit profile and revenue.

Compare online business lenders:

Traditional banks and credit unions

Traditional banks, like Bank of America and Wells Fargo, are good sources of competitively priced term loans, equipment loans, real estate loans and lines of credit (LOCs), but they also have some of the toughest requirements around. They’re best for established business owners with credit scores above 700 and revenue exceeding $100,000 a year.

Credit unions also offer competitive rates if you’re after a term or equipment loan or LOC, and they tend to have more flexible requirements than a bank, especially if you have an existing relationship. But only a few credit unions offer business loans, and you have to be a member to apply.

SBA loans

SBA loans, guaranteed by the Small Business Administration, offer low-interest term loans that can help business owners cover startup costs, buy real estate, access working capital and more. With lower down payments and more flexible terms than many bank loans, they’re often sought after by startup-ups and businesses that may not qualify for a traditional bank loan.

There are banks and online lenders that partner with the SBA to fund SBA loans, but you’ll need a down payment from 10% to 30% to qualify and, in some cases, collateral. And be prepared to wait: SBA loans typically take from one to three months to fund, but using a top SBA lender could help speed up the process.

Business lines of credit

If you’re an established business that regularly needs access to funds, a revolving business line of credit (LOC) may work well for you. LOCs allow you to only pay interest on what you borrow, making them ideal for accessing working capital or paying for ongoing projects. As credit lines, the line typically becomes available again as you pay it down. LOCs generally come with terms from one to two years and may require collateral or be unsecured.

Business credit cards

Business credit cards are often easier to qualify for than a term loan or line of credit and can be used to pay for business expenses while offering a range of business-related perks and rewards. They can also be a useful source of funding for startups, since having a good personal credit score may be the biggest factor in securing one, not your time in business or revenue.

Invoice factoring

Invoice factoring involves selling your unpaid invoices for a discount to a third party called a factoring company. Instead of waiting 30, 60 or 90 days to get paid — you get around 85% of your total invoice value upfront and pay a fee on the remaining 15%. And since this type of financing relies on the value and creditworthiness of the invoices for approval, you don’t need good personal credit to qualify.

Microlending

Microlending involves offering small-dollar loans, known as microloans, to historically disadvantaged small business owners who may not qualify for other types of loans. Microloans are often made through non-traditional online platforms and often rely on peer-to-peer lending.

For startups and bad credit borrowers who need less than $50,000, a microloan from a lender like Kiva might offer the best deal available — since it doesn’t charge any interest on its microloans. But you’ll need to meet specific criteria to qualify.

Crowdfunding

Crowdfunding is a popular marketing tool that helps you gauge interest in your product or service and gain potential customers while you drum up funding for your business. There are different types of crowdfunding, including donations, rewards and equity-based crowdfunding.

However, successful crowdfunding requires a lot of work, strategic marketing and transparency with backers. And while it can be a viable funding option for some startups and entrepreneurs, it’s not the best solution for everyone.

Investors

Angel investors and venture capitalists are two types of investors who provide funding to businesses in exchange for a stake of ownership. The difference is that angel investors are typically wealthy individuals who invest their own money in early-stage startups, while venture capitalists are members of firms that invest funds from various sources, including limited partners (LPs), insurance companies and institutional investors.

Personal loans

To get a personal loan for business use, you’ll want to first start by checking to see if the lender you’re interested in applying with has any limitations on loan usage. Some personal loans can’t be used for business use. Like with most loans, lenders will determine your eligibility by looking at your overall creditworthiness. Compare several of the best personal loan lenders to score the best rates and terms for you situation.

Bootstrap your business

As the name suggests, bootstrapping your business means starting from the ground up without relying on external funds from a bank or other lender. It might involve using your personal savings, credit cards or home equity to fund your business. Bootstrapping allows you to maintain control over your business, but it can put your personal finances and relationships at risk.

How to make your business more attractive to lenders or investors

Investors are always on the lookout for the “next big thing,” so that means they’ll be interested in companies that are innovative and show promise of success. Here are 6 ways to increase your chances of securing a business loan or financing from an investor:

1. Have a competent and experienced management team.
2. Show you have a proven track record of making money and generating a profit.
3. Have a solid business plan that shows how you’ll generate income and pay the loan back.
4. Have a detailed marketing plan that outlines the channels you’ll be using to reach customers.
5. Be transparent about the state of your business, the challenges it faces and how you plan to overcome them.
6. Highlight your long-term vision and plan for the future of your business.

Tips on business funding for startups

While startup funding can be challenging to secure, on the plus side, startups can be in a unique position when it comes to securing funding. For example, entrepreneurs can take advantage of startup incubators and rollover for business startups (ROBS).

• A startup incubator is a specialized hub, like MassChallenge, that provides support to early-stage startup businesses, helping them overcome the challenges of running a new business. These organizations offer a variety of resources and services.
• Rollover for Business Startups (ROBS) is a method of business financing that lets individuals use their own retirement savings to fund a startup, but certain rules apply. They can be an attractive option for business owners who don’t want to take on new debt.

Frequently asked questions

Is there business funding for startups?

Yes. While more limited than the options for established businesses, there are several options for startup funding, including SBA 7(a) loans, microloans, personal loans and finding a lender that works with startups. See the best business loans for startups to learn more about the options available.

What is debt vs. equity financing?

Debt financing involves borrowing money from an outside source, like a bank or online lender, which you pay back with interest or fees — or both. Equity financing, on the other hand, involves selling a portion of your business to investors in exchange for capital. It doesn’t require repayment, but you give up a stake in your business.