How to Get Small Business Funding

As many as 1 in 5 start-ups will fail in the first year and by year five, more than half will have been resigned to the small business graveyard. The old adage that “9 out of 10 startups will fail” is true, and although it isn’t as doom and gloom as it would initially suggest (that failure rate won’t occur until the 10-year point) it’s an alarming statistic, nonetheless.

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Staying afloat is difficult and involves a lot of hard work, plenty of funding, and a little bit of luck. We can’t help you with the luck or the hard work, but we can show you where to get the funding you need. And if you use this early enough, you could improve your chances of becoming one of the 1 in 10 that actually make it past their tenth year.

Types of Small Business Funding

Many business loans rely on your personal credit history, which means your credit report will be checked and your credit score will be considered. Small business owners may, therefore, be held accountable for these loans and if anything happens to the business, they will still be required to make payments. 

This isn’t always the case, however, and there are numerous different financing options available for small businesses. We have listed some of the best options below.

Bank Loan

A traditional bank loan is one of the best ways to get funding for a small business. The problem is, it’s not as easy to get your hands on a traditional bank loan as it once was. The crash of 2008 was well over 10 years ago now, but it changed the lending sector and ever since then banks have been very reluctant to lend small businesses money.

You’ll be asked to jump through several hoops, complete stacks of paperwork, and potentially use your home or other assets as collateral. They’ll also complete a personal credit check and make some pretty strict demands.

On the plus side, bank loans offer some of the lowest interest rates of any small business loan and you can also get all the money you need to grow your company. If your business is new and you don’t have any personal assets to use as collateral, your odds of getting a sizeable bank loan are next to nothing.

Small Business Grants

Getting a grant is not simple, far from it, and even if you do secure payment, it’s unlikely that you’ll get the exact sum you need. However, if you’re prepared to put the time and effort in or hire someone that can do the work for you, it can be a good way to secure business funding.

A grant is a lump sum given to you by the government or an organization, with the goal being to help you succeed. After all, communities and the nation on the whole benefits when startups succeed, as they pay more taxes, hire more employees, and keep the economy ticking over. 

You have more chance of succeeding when applying for a grant if you run a business focused on green energy or one that helps people in need. If you think your business meets the criteria, you can try the following sites to get a grant:

Merchant Cash Advances

A merchant cash advance gives you money in exchange for a percentage of your future earnings. These loans are based on your earnings, so you will need proof of this to apply. Most merchant cash advances are short-term and calculated based on how much you earn and how long it will likely take to clear the full loan amount.

For instance, if you borrow a sum of $30,000, you may be asked to repay 10% of every payment you receive, with the lender calculating that you’ll repay the sum (with interest) in 12 months due to your annual earnings of $400,000.

Business Credit Cards

Credit cards are rarely a good idea for funding a business startup. However, if you don’t have any other option, have a low-interest rate and are confident that you can repay the balance in full, it’s something you might want to consider.

However, it’s important not to overspend. It’s perfectly fine to spend an amount that you know you can repay at the end of the month, but as soon as you start rolling that balance over several months, you’ll put yourself at risk. Interest will compound, the balance will grow, and before you know it, you’ll have a massive credit card debt to contend with on top of your business responsibilities.

PayPal Working Capital

PayPal Working Capital is a type of merchant advanced loan as it’s gradually repaid every time you receive money. These loans are offered through PayPal accounts. The older the account is and the more payments it has received, the higher the PayPal Working Capital amount will be. 

If you’re earning $50,000 a year through your account, they may offer you anywhere from $10,000 to $20,000. If you’re earning half this amount, that range will reduce by half as well. You don’t pay interest on PayPal Working Capital loans, but you will pay a fee, and this will be added to your total balance.

This balance is then repaid at a rate chosen by you. You can choose to repay anywhere from 10% to 30% of every dollar that you earn; the higher the rate, the lower the fee. The only requirement for these loans is that you repay at least 10% of the balance every 90-day period, but even if you reach this sum before the 90-day period, you’ll still be required to continue making payments.

As an example, let’s assume that you borrow $10,000 and promise to pay back 20% of every dollar you earn. You may be charged a fee of around $1,000, which means the total repayable balance is $11,000. After a grace period of just a few days, PayPal will start taking 20% from every payment you receive and put this towards the balance.

If you repay $1,100 in 20 days (which means you have earned $5,500) your 90-day obligation will have been met, but they’ll continue taking 20% from your income until you clear the balance in full. Once you do, you can take out another PayPal Working Capital loan after waiting for a few days for the first one to reset.

These loans work best for self-employed individuals who have owned their PayPal account for many years and have used it for all their business needs. They will have the history and the cash flow needed to receive large estimates and that should ensure they’re offered a sizeable sum.

Crowdfunding Platforms

Crowdfunding sites like Kickstarter and Indiegogo have created a small business revolution. Countless businesses and products have launched through this platform and it has become the ideal springboard for talented innovators and their ingenious ideas.

There are those who think the crowdfunding bubble is about to burst and those who feel like the golden age of crowdfunding is long gone. To an extent, this is true, as there are many disillusioned investors out there who have been put off by scams and failed projects. However, the actual act of crowdfunding is bigger and more varied than ever.

The only real problem is that creating a successful crowdfunding campaign is incredibly difficult, as you’ll need an effective marketing campaign and that may require an investment of time and money that you just don’t have. 

You will also need a product or service that people can get behind, as well as an incentive to offer them for their investment. These perks generally include a product that is currently in development, one that is often provided at less than the suggested retail price.

For many businesses, this is just not realistic. But crowdfunding doesn’t end there. There are also online lending sites that use the same model, connecting investors who have money with businesses that need money.

It’s a great idea and one that benefits everyone. The businesses can get the money they need from members of the public willing to help them out, and those investors can get a rate of return that is much higher than they’d get from a savings account.

Friends and Family

If all other funding options fail or you just need a few hundred or thousand dollars, you should think about asking your friends and family. It’s a big ask for any friend or family member, but if they have the money, live comfortably, and offer their help, it’s worth a shot.

You can offer to pay them back if it’s a short-term loan and even promise to give them a little interest on top. If it’s a larger loan, think about offering them a share in your business. You could even treat it like an episode of Shark Tank, inviting all friends and family around, showing them your business plan, making a pitch, and asking if any of them are interested in helping you out.

Don’t give too much of your business away, and if anyone is buying a significant share, make sure they’ll help in other ways. It can be disheartening to work 12 hours a day on a co-owned business when the other owner doesn’t lift a finger and barely knows what you do every day.

If your friends and family do give you a loan, make sure you pay them back on time and don’t feed them constant excuses. It’s true that they won’t be as strict and demanding as a bank or online lender, but that doesn’t mean that you should take liberties. 

As soon as you stop making those monthly payments a priority, you’ll put your relationship in jeopardy. Money can destroy the best of relationships, so keep this in mind when you start skipping those monthly payments.

Equity Loans

If you’re confident that you can make a success of your business and are realizing a dream in making it a reality, you can consider home equity loans and cash-out refinancing. 

This is not something we’d recommend, as you’ve spent years paying your mortgage and securing one of the most valuable assets you can have. The last thing you want to do is throw all that away on a business that could fail within a few short months.

However, many homeowners use home equity loans and lines of credit for this purpose. A home equity loan or cash out refinance essentially swaps the equity you have built up for a cash sum. A home equity line of credit, on the other hand, works like a credit card, only you draw money out of your equity.

Do You Need Small Business Funding?

Now that we’ve shown you how to get funding, one question remains: Do you need it? For most businesses, the answer would be a resounding “yes”, but therein lies the problem and the reason that so many small businesses fail.

Everyone can see impending and inevitable failure when they’re not the ones suffering the consequences. How many times have you watched Shark Tank or the countless other business-related shows, only to find yourself shaking your head when you see a business owner in complete denial? They throw money at their idea or their business, even though it’s clearly going nowhere fast.

They re-mortgage their homes to keep a dying business afloat and throw everything they have at it just to buy themselves a few more weeks or months, even though the odds of a turnaround are akin to a lottery win. 

If you’re in this position, your business is hemorrhaging money, your ideas are failing, and nothing seems to be working, then maybe it’s time to think about giving up, calling it a day, and trying something new. 

Just because you’ve already invested $100,000 into the business doesn’t mean you’re obliged to invest another $100,000; just because you’ve sunk a lot of time into it doesn’t mean you should be prepared to remortgage your home just to keep it alive.

And if you’re not coming from a position of debt and are contemplating a small business loan so you can take things to another level, try to keep it on the small side. The less you invest, the less you stand to lose. Not only is this important for your personal finances and sanity, but it also means it will be easier to walk away if everything goes wrong.

A small business loan isn’t the only option at your disposal; don’t rush in, don’t make rash decisions. Take your time, think it through, and borrow the smallest amount you need.

Bottom Line: Keep Your Loan Under Control

Once you have your business loan, it’s time to prioritize and keep things under control. If you don’t have an accountant, get one; if you haven’t created a detailed plan of your outgoings and incomings, create one. 

Read the terms of the loan, understand exactly what you’re responsible for and what happens in the event that you fail to meet the payments, and then prioritize the payments. Don’t let your new business ruin your personal credit, as you could be paying for your mistakes for years to come.