Funding Solutions for Small Businesses

Starting a small business is more than just a dream; it’s a bold leap into innovation, passion, and resilience. Yet, one of the most daunting challenges is securing the funds to bring their visions to life. To uncover the best funding solutions, we reached out to several seasoned entrepreneurs who shared their invaluable insights and experiences. Here are their thoughts!

Crowdfunding

When I started my business, I had one investor interested in my endeavor already, but I had to come up with the other half of what I needed. I turned to crowdfunding, so I didn’t increase any risk in investing in my business. I was able to raise the necessary seed funds and get my business off the ground primarily because of crowdfunding. 

Dustin Sitar, CEO of The Groom Club

Pre-Selling for Generating Funds and Gauging Demand

I had a venture before where I used pre-selling to generate funds first. With this approach, I could gauge the demand for what I wanted to offer, so I had a better estimate of how much I’d need to deliver the first sets of orders. I was able to predict sales and finance the early operations of my small business. It saved me time and money, and I didn’t have to get another loan or borrow from anyone. It’s also a good method to understand my target customers so that I can polish and personalize my services before the launch.

Mark Damsgaard, founder of Global Residence Index

Local Banks or Online Lenders

There are many different financing solutions, but in general, there are two types of funding solutions for small businesses. Knowing which options you should go with depends on what you need the money for:

1) Bank loan/term loan/line of credit:

These loans are better as you get the most amount, cheapest rates, and longest terms. However, they require you to be in business for a couple of years, show profits on the tax returns, collateral (sometimes), and (usually) a credit score above 720.

2) Bridge loan/short-term loan/merchant cash advance:

These loans can be approved quickly. Some lenders can approve them in a couple of hours, as they are revenue-based. They don’t require tax returns or collateral. You usually don’t have to have the best credit score or be in business for a couple of years. Usually, the process is providing the lender/bank with the last three months’ bank statements, and the approval will be based on those financials.

At CrystalBusinessFunding.com, you only need to be in business for at least one year and generate $20k+ in monthly revenue.

In short, if there is no need for money right now, go to your local bank.

However, if you don’t have the best credit score or want the money fast, try an online lender like Crystal Business Funding.

Sal F, director of Crystal Business Funding

Loans, Local Resources, and Private Investments

If you’re lucky, you already have the funds saved to start your small business. But for most people, this isn’t an option.

The first line of defense for this is business loans, which are a good option, especially if you have a good business plan and get a good repayment deal. 

However, I’d suggest looking into local resources. While these options might be smaller and more competitive, financiers or grants from SBAs offer good terms. Some even offer mentoring and other resources to help you get your small business going. 

You also don’t have to limit yourself to government help. There are private groups excited to invest in small businesses. Just always read the fine print and do your research before partnering with any group.

Sangwon Kim, CEO of Focus Keeper

Online Loans

If you can’t secure traditional loans or manage the costs of bootstrapping, online lending offers an alternative that gives you faster, more flexible access to capital. Most online loans have much more lenient criteria than banks, but they also tend to charge higher interest rates and fees. Sometimes, a bank loan isn’t in the cards, even if your business plan is sound. But it’s crucial to examine your plan carefully because there’s a reason banks aren’t approving your loan applications. If your research and analysis are sound and you’ve rigorously explored all potential for failure to help mitigate your risk, it might be time to explore online lending options.

Robert Kaskel, chief people officer at Checkr

Revenue-Based Financing

I’ve employed revenue-based financing (RBF) for businesses with strong sales but perhaps not enough collateral for traditional loans. RBF is a type of financing where investors provide capital to a business in exchange for a percentage of its ongoing gross revenues. The repayment terms typically involve a cap, and once a business pays back a predetermined amount, its obligation to the investor ends.

This model can be incredibly beneficial for small businesses with predictable revenue streams and high margins, but they may be too young or too innovative for conservative bank lenders. What sets RBF apart is its flexibility. Repayments scale with the business’s revenue and are less burdensome than fixed loan repayments.

RBF preserves cash flow during slower periods and aligns the interests of the business with those of the investor, as both parties benefit directly from the company’s growth. Because this approach doesn’t require equity dilution, founders retain full control of their business. Hence, this is a compelling option for those who wish to avoid the potential downsides of venture capital or equity financing.

Michael Schmied, co-founder & lead financial consultant at Kredite Schweiz

Create Business Connections in Your Industry for Funding

When raising funds for small businesses, it can be tricky to navigate the waters of raising capital alone. Our sober living facility was made possible when my co-founder and I decided to dedicate a month of focus to seeking partnerships for funding. We found partners through investors interested in supporting facilities like ours, particularly in the mental health space. We met these partners through business conventions or mutual connections in the healthcare provider industry. What worked for us mainly was that we offered equity shares in exchange for the investments made. I think it made our initial capital raise run sustainable for our business model of providing mental health and behavioral health care.

David Beasley, founder & program director of Design For Recovery

Local Investors

There are more virtual opportunities to explore than ever before, but I firmly believe it’s much easier to secure funding from people in your local community because proximity matters. Angel investors and local investment groups want to make money but also improve their local business community and find entrepreneurs they believe in. 

You face less competition if you ask local investment groups to fund you, and even the investors who say “no” can help expand your local network and get you closer to finding your “yes.” Some big investors don’t want to touch the digital world and prefer to do their business and build relationships in person. In person, investors get to know the depth of your personality, which often sells your business venture because every dollar is an investment in your ability to succeed. Leverage community support, attend local events and meetups, and establish deeper relationships with the people around you. Sometimes, the old-fashioned way works best!

David Ciccarelli, CEO of Lake

Strategic Partnerships

One of the best ways to get your business off the ground if you can’t find traditional financing is to find a strategic partner who can help. Large, successful companies are often looking to expand their businesses through up-and-coming options, so if you have a complementary product or service, it’s absolutely worth the ask. 

But you can’t just partner with anyone. You need to find businesses with an overlapping target market and a solid track record proving their trustworthiness. Doing a partnership right is a win-win — you get ample resources, and your partner can expand its revenue and business growth.

Hardy Desai, founder of Supple

When to Apply for Personal Loans

Using a personal loan to fund your business development can be a relatively safe way to get your business started on the right track. Personal loans can be a lot easier for people to qualify for than business loans. If you are struggling to come up with the finances yourself to start your entrepreneurship, then applying for a personal loan through a bank or a trusted friend is a decent resource to help you achieve your goals. Don’t use a personal loan for your business if you do not have a solid business plan in the works. Also, don’t use a personal loan for your business if you are prone to debt or have a high DTR.

Jake Hill, CEO of DebtHammer

Flexible Private Investments

Personally, I’ve had success with business and personal loans, but I know things like private investors and crowdfunding from friends and family are becoming more popular as options for small business funding. I do like the flexibility and more private and personal nature of this type of funding. It can help immediately establish a connection with your business for the people who’ve helped get it up and running, which can be instrumental in the long-term success of small businesses. It also offers more options for prospective business owners who may not have the business credit or financial history to secure a business loan. 

David Kemmerer, co-founder & CEO of CoinLedger

Local Grants

It can be worthwhile to look into local grants. Many cities, counties, and even states have programs to support small businesses by giving them grants or loans to cover their startup costs. While the specifics will vary from place to place, many are available with low credit or no credit history, and they tend to come with very favorable interest rates and repayment terms. There are often specific grants offered to unique demographics, like female or BIPOC entrepreneurs. With a little bit of research, there’s a good chance you’ll find something you may qualify for.

Carter Seuthe, CEO of Credit Summit Consolidation

Balancing Funding and Control

Finding investors is one of the more common funding solutions for small businesses. Convincing someone to believe in your idea enough to spend lots of money on it is no easy feat. Even if you do, you have to know what having investors means. Most will want a stake in your company, and some may want a level of creative control over what you do. But, for many entrepreneurs, it’s the only available route. You have to be strategic about it.

Jeremy Yamaguchi, CEO of Lawn Love

Angel Investors

Angel investors are usually the first people who are willing to bet on an entrepreneur. It’s a risky bet because, often, at that stage, the idea, the team, the business model, etc., are yet to be defined. There are a lot of questions and few answers. The money (and time) the angels put in are to help find the right answers. While the money is important, even more important at that stage is the ability of the angel(s) to help — sometimes with helping flesh out the idea, sometimes helping build the business model and analyze the space and opportunity, and sometimes to make connections and help with hiring, etc.

All angel investors want a financial return, but some also have other motives such as supporting entrepreneurs, looking for board positions, creating a group of companies they can provide and sell services for, some entertainment in their early retirement, etc.

They typically invest in companies wanting smaller amounts of money ($100–$500,000) and earlier in their life cycle than professional investors and VCs. Some super angels invest very large sums, but typically, they behave as VCs.

Echo Yao, co-founder of Langchu Lighting

Bootstrapping

If you have some savings or can generate cash flow from your business, you can start by funding your business yourself. This is called bootstrapping, and it can help you build your business without taking on debt or giving away equity.

To me, bootstrapping simply means you start a business with as little resources and finances as possible + a boatload of really hard work. That is not only the best method, it’s really the only one. It’s the definition of bootstrapping.

There are ways to determine if your business idea has a leg to stand on before putting any money into it — and strategies to test your product/service/idea without spending more than a few thousand dollars. This would be the “most effective method to bootstrap your business” without breaking the bank.

Caroline Nganga, CEO of Myagrovet

Invoice Factoring

In my experience, invoice factoring is a highly effective yet often overlooked strategy for small business funding.

Invoice factoring can be a game-changer for businesses facing cash flow challenges. 

It involves selling your outstanding invoices at a discount to a factoring company. This way, you get immediate cash, which is crucial for maintaining operations or funding growth initiatives.

It’s a practical option, especially for businesses with long payment cycles. 

Factoring companies typically pay you a significant portion of the invoice value upfront and the rest, minus their fee, once your client pays.

This approach is less about borrowing and more about accelerating cash flow. It’s particularly beneficial for businesses that may not qualify for traditional bank loans due to a lack of collateral or credit history. 

Factoring companies also often provide valuable services like credit analysis and collection support, reducing your administrative burden. By leveraging unpaid invoices, your business can maintain a steady cash flow, enabling you to invest in growth opportunities without taking on debt.

Gates Little, president of altLINE Sobanco

Peer-To-Peer Lending

A great option that is gaining a lot of traction is peer-to-peer lending. 

These are platforms that allow private investors to provide loans for businesses. Depending on the lender you choose, the amounts range from just over $500 to $500,000. 

Many businesses are gravitating towards this type of funding because the services are streamlined, there are lower fees, customized repayment schedules, and less red tape to acquire the funding. 

In order to choose the right lender, you need to look at the ones available and find the one that best suits your needs.

There is no one-size-fits-all solution, and there are pros and cons to each of them. Be sure to compare each lender’s offer, customer service, reputation, reviews on their services, loan size, rates, and terms to decide whether or not they suit your needs.

Zach Robbins, founder of Loanfolk

Venture Capital Funding

Venture capital funding is associated with large investments for entrepreneurs who have developed ground-breaking new technologies for which they own the IP (intellectual property). In reality, however, venture capital funds invest in most industries from the outset of an idea (pre-seed) to advanced ideas with lots of traction in the market (seed to Series A).

With websites like OpenVC, small business owners can even apply for funding without having to use advisors like myself, and they can access an entire list of venture capital funds without any prior research or effort.

Even if you feel like you need an advisor to help you in the process, advisors like myself will often only charge a percentage of funds raised, so you will not incur any fees unless you successfully raise money.

Keys to securing VC funding:

• DO NOT cold approach thousands of VC firms with template pitches (much like people do on HARO…). VC firms typically receive thousands of pitches and can easily see through pitches that are well thought out versus those that have put in no effort. Put the time in to approach only those VC firms who can write the cheque size you need and invest in your industry. Most VC firms will have previous investments on their website, so try to look for previous investments they have made that are similar to your company.
• Dont spend hours writing a fancy pitch deck. Explain the problem your business solves, the solution you have come up with, and any traction your idea already has (15–20 pages of a PowerPoint is usually more than enough). VC firms dont have the time to read anything longer!
• Get your timing right — dont approach VC firms at Christmas or Easter, when they will be busy completing deals. Try to reach out to them when they are building their pipeline and are actively looking for new investment opportunities.
• Be clear on how you will spend the investment proceeds. Simply giving a high-level narrative is not enough. Try to detail precisely how you will spend the money (e.g., new staff and equipment) and how long the cash will keep you going (known in the industry as cash runway).
• Bonus tip: VC firms make money when selling their investments 5–7 years later. If you can do that work for them by researching who might buy your company in 5–7 years after it has grown and matured, VC firms will be very impressed.

Manager in corporate finance & owner of Bamboo Soft