A traditional bank loan is one of the most common ways small business owners subsidize their endeavor. To qualify for a cash infusion from a bank, you'll typically need a strong business credit score, a strong personal credit score, a well-crafted business plan, and often some collateral. But even if you don't meet all those qualifications, you may be able to obtain financing with help from the U.S. Small Business Administration (SBA).1 While SBA loans often come with more appealing terms (such as lower down payments), they don't come directly from the SBA; instead, the agency partners with banks and other lenders to help back the loan that comes from the financial institution, thereby reducing its risk.
If you're unable to qualify for a business loan, you might instead choose to pursue a line of credit, which is similar to a loan but with a primary feature of a credit card, in that you only pay interest on the amount of money you are using at any given time. Unlike a loan that is applied to a specified activity, such as expansion or inventory, you can use a line of credit for anything you choose, and it often doesn't require collateral. Another option is a credit card; the Goldman Sachs Voice of Small Business in America: 2019 Insights Report2 found that 31% of startups used a personal credit card to start their business.
Small business grants
Another avenue for financing your business is obtaining a small business grant, which can come from a surprising array of sources, from local foundations to national companies. To find potential options, start at a clearinghouse like Grants.gov3 or search online for grants specific to your location, industry, and/or target market. Many small business grants are specifically designed for women or minority entrepreneurs, so include those words in your search if you fit the bill. Remember that writing an effective grant proposal can consume an enormous amount of time, so be judicious about where you apply and only go for those that you feel you have a solid chance of winning.
You might have heard of platforms like Kickstarter and Indiegogo, where the general public can peruse business ideas and contribute no-strings-attached donations to those they find compelling. It's become quite popular: According to Kickstarter data4, the platform has funded more than 475,000 projects to the tune of nearly $5 billion. To help fuel interest, most small business owners offer a perk for being an “investor," such as a discount or even a free item once it's produced, so be sure to factor in how that fulfillment piece might eat into your future time and profit. In addition, the most successful crowdfunding campaigns are those that attract a lot of eyeballs, and it can take a lot of marketing muscle to build ample buzz.
Many affluent investors, either individuals or investor pools, are just waiting to hear the right business idea — and are willing to put their money where their mouth is by providing a cash infusion in exchange for a cut of the business. Before agreeing to accept their money, find out what their involvement will be, such as if they want to own a piece of your company as a “silent" investor or whether they expect to have input, and decide if you're amenable to that. Remember that an angel investor's end game hangs on risk and reward, so the more risk they undertake, the higher the reward they expect. Angel investors can often be found via local networking groups; search online for opportunities or ask industry trade groups or the local chamber of commerce for suggestions. Some groups also hold “pitch fests" where you are able to share your idea to multiple investors or investing groups at once, similar to a “Shark Tank" competition on a smaller scale.
This model is just what it sounds like — you're taking the plunge with your own nest egg. And you'll find you're in good company with a survey from the Kauffman Foundation5 revealing that nearly 64% of respondents used personal or family savings to start their business. There are several alternatives for self-funding: you might take out a second mortgage or decide to sell an asset like a second home and funnel the proceeds into your company. It's a good idea to save up before quitting your day job; one rule of thumb is to sock away at least six months of personal living expenses to cover those potentially lean start-up months.
Loans from friends and family
The good news is that this cohort already believes in you. The not-so-good news is that owing money to friends and family can be delicate, or even tense, if they decide they have a say in how you live your life and conduct your business while they wait for their payback. That's why you should make sure to have an airtight agreement with them prior to accepting the capital, detailing the reimbursement period and terms — and what happens if things don't go as planned. Be upfront about the risks, but also be cautious about going this route at all in order to preserve your most important relationships no matter what happens to your business.
Want to know more about funding your dream? A great place to start is with a Synovus business banker who will make an honest appraisal of your business and help turn you toward the financing source that's right for you.