arrow-down logo-vertical navigation-down navigation-up stars tools

How to Get Funding for Your Small Business

One of the questions every single newbie entrepreneur asks themselves is how to get funding for their startup. There is a misconception that funds are readily available. No wonder, the media covers big round VC injections into large tech companies all the time. What are the options for the little guys though? The entrepreneur who's looking for $10,000 to start an eBay business, renovate a bicycle shop or open a bakery?

This post paints a realistic picture of the funding landscape for newbie entrepreneurs and small businesses. This isn't an all-inclusive list but highlights the most common funding routes for any entrepreneur.

1. Ask your family or friends for a loan to start your business

Countless small businesses are started with the help of a loan from family or friends. Kevin O'Leary for example, Shark Tank and Dragon's Den investor, started his business with a $10,000 investment from his mother.

Do you have a well-off uncle? Great! Prepare your pitch and ask for the money. Borrowing money from friends or family is tricky business however. Carefully consider who you ask for the money and how this will affect your relationship, especially if you are struggling to repay the loan should things not go as planned.

It's also wise to use a Peer-to-Peer lending service. These services allow you and your personal lender to manage the transactions and repayments through an online platform. Having a solution like this in place will eliminate misunderstandings and provide some much needed structure.

Here are two of the big Peer-to-Peer lending services:

By GraphicSprings.com
By GraphicSprings.com

Prosper allows you to post and manage your personal loan listing. You can create your loan request for free here. Once live your personal lender can accept the request, also at not charge. You can then make your repayments which your lender can monitor through his/her login.

By GraphicSprings.com
By GraphicSprings.com

LendingClub is the largest Peer-to-Peer lending service and recently also expanded into providing small business loans. Set up and manage your loan listing here.

2. Apply for a personal bank loan or line of credit

The days of walking into a bank and securing a business loan based on some back-of-the-envelop projections are long gone. Banks are looking for a financial track record that demonstrate your business's ability to repay the debt. By definition start-ups don't have a financial history.

The most realistic approach is to structure your funding request as a personal loan. If your personal financial situation allows, you can fairly easily secure a loan that you can then use for your business expenses. It's important to remember that you will be personally liable for repaying the debt - not your business.

Inc. has written a helpful piece on how to use a personal asset loan for your business.

To get started schedule an appointment with your local bank. It's also worth while to do a rate comparison. Here are two sites that allow you to quickly find and compare personal loan rates:

By GraphicSprings.com
By GraphicSprings.com

It's easy to get started with your bank loan search. Select Personal Loans and enter your Zip code. At a glance you will find competing personal loan providers. They each list their credit score and annual income requirements which will help you quickly determine if you would quality.

By GraphicSprings.com
By GraphicSprings.com

To get started with Lendintree click here. Select Personal Loan and then Business for Loan Purpose. From there answer some basic questions about your annual income, employment status, etc. to get quotes.

3. Pitch your idea to an angel investor or network

Angel investors play a vital role in providing seed capital for start-ups. An angel investor is a person with business acumen who uses their personal network and experience to invest in small businesses in exchange for equity or convertible debt. Angels typically have a set of criteria such as preferred industries, investment size, geographical location, etc.

If you are willing to give up equity this is certainly a route worth considering. Many cities host angel networks that meet regularly to hear start-up pitches. A quick Google search will help you find the closest group to you. Entrpreneuer.com has written some great tips on how to attract angel investors.

Here are two great resources that list active angel investors:

By GraphicSprings.com
By GraphicSprings.com

The Gust platform has already funded over 1,800 startups. You can search investors by industry, location and keyword. To list your business and connect with angel investors click here.

By GraphicSprings.com
By GraphicSprings.com

Angel is another great community of startups and investors. You will find many big time investors listed on here and you can communicate with them by signing up here.

4. Use a crowdfunding platform to raise your startup capital

With the difficulty of securing business loans for startups, especially since the crash in 2008, alternatives have sprung up. Crowdfunding platforms have gained in popularity and provide a great alternative to traditional funding methods for startups, nonprofits and individuals.

The concept is simple. Create your listing, share with friends and use the power of the masses to fund your business venture. Forbes wrote a great post on crowdfunding and whether it's right for your business.

Here are three popular sites to help you raise money for your business:

By GraphicSprings.com
By GraphicSprings.com

Fundable has helped small businesses raise over $164 million in capital. It's easy to get started and this page will answer some of the most common questions before getting start. Register and create a listing for your business here.

By GraphicSprings.com
By GraphicSprings.com

Gofundme has raised over $900 million to date for charities, individuals and events. It's a crowdfunding platform with a focus on the individual; however, you can still create a campaign to raise funds for a business. Register and promote your campaign here.

By GraphicSprings.com
By GraphicSprings.com

If you plan on launching a business in the creative or technology sectors this is a great resource. Kickstarter has already processed more than $1.5 billion in pledges. To get your project started click here.

5. Apply to a seed accelerator or incubator to get your business of the ground

Seed accelerators or incubators allow you to define, refine and grow your business. These organizations can be privately run or government sponsored agencies and provide facilities such as shared office space, admin support and mentoring from successful entrepreneurs and venture capitalists. Most of these programs also provide you with seed capital.

Yael Hochberg (MIT Sloan School of Management ) and Susan Cohen (University of Richmond) have ranked the top 15 US Seed Accelerators. See the full list of seed accelerators here.

The top three are highlighted below:

By GraphicSprings.com
By GraphicSprings.com

Y Combinator has invested in 800 startups since 2005. Startups typically receive $120k in seed capital and move to Silicon Valley for an intense 3 months program. To find out more about eligibility requirements and the application process click here.

By GraphicSprings.com
By GraphicSprings.com

TechStars asks for 7-10% equity in return for intensive mentorship, exposure to a network of investors and $118,000 in funding. To apply to their program click here.

By GraphicSprings.com
By GraphicSprings.com

AngelPad is an intensive mentorship program launched by ex-Googler Thomas Korte. Find out when the next deadline is and submit your business application here.

6. Find out if you or your business are eligible for government grants or loans

Contrary to popular believe the government doesn't indiscriminately hand out government grants and interest free loans to start a new business. These programs are funded by tax dollars and therefore require very stringent compliance and reporting to measure their effectiveness. These type of funding initiatives almost exclusively go to non-profits and educational institutions.

All is not lost however. The US Small Business Administration (SBA) is a great resource in identifying potential loans and grant opportunities.

By GraphicSprings.com
By GraphicSprings.com

One of SBA's core programs helps individuals who would have difficulty qualifying for a traditional bank loan obtain funding to start or expand a business. Find out more about loan eligibility and terms here.

Depending on your business there may be some loans and grants available at the state and/or local levels. Use SBA's grant and loans search tool to complete your research.

7. Play with the big boys and go after venture capital

If your startup requires a lot of capital you will most likely find yourself travelling down the VC path. You'll end up reducing your equity stake, especially if you require several rounds of capital injections, but you are gaining a smart capital partner. Venture Capital firms aren't just a source of funding but provide mentorship and access to their network of contacts which can range from potential clients to employees and partners.

Securing funding through VCs is no easy task. Mashable has written a great post on what's required from a startup to successfully attract venture capital. Finding the right VC fund to pitch to is key and this free tool allows you to find a VC based on your industry, capital required and funding stage.

Entrepreneur.com has also ranked the top early-stage venture capital firm in the US.

8. Bootstrap to gain the traction your business needs

Last but not least, bootstrap your business. Sweat equity might not be that glamorous but can help you gain the traction you need. Not having a big bank account will force you to be resourceful and refine your business along the way. Once you have proven your business model and built enough traction you can go after angel investors, VC capital or simply get a business loan to scale your business.

The majority of startups are still financed through personal savings and credit card debt. Given these are your hard earned dollars and high interest debt you want to be resourceful and bootstrap as much as possible.

The infographic below illustrates how you can launch your business for less than $1,000.

By GraphicSprings.com
By GraphicSprings.com

Recent articles