6 Reliable Ways to Finance Your Small Business Idea

by Jennie E.

April 1, 2019

Founder Guides 9 min

6 Reliable Ways to Finance Your Small Business Idea

Your business needs funding to take off. Whether you’re setting up a cafe, selling your art online, or starting a consultancy agency, you have to pay for marketing, products, rental, utilities, and more.

But what if you don’t have enough starting capital?

Good news! There's a wide range of funding options to turn to. Here is a comprehensive list.

Note: Some business funding options may not be available in your country, so make sure to check with your local authorities.

Small Business Funding: Raise Money for Your Small Business

Bootstrap your business

Pros	Cons
You have full control and ownership of your business. It’s easier to raise as you won’t need to create a formal business plan. You have a better sense of accomplishment when your business succeeds.	There are low chances for your business to survive. There’s little room to scale big and fast. There’s no top-level help from investors with experience in your field. You have to hustle a lot harder to grow your business.

Heard of the old saying, “pulling up your bootstraps”? The same idea applies to business.

Bootstrapping involves using your own savings or earnings from the business as funding. Of course, family and friends can contribute (a.k.a. “love money”, but we’ll get into that later).

Still, you have to be extra careful with spending, and generate income as soon as possible. Cut back on the fancy stuff, and focus on making your first sales.

Naturally, bootstrapping works better for businesses that have lower start-up costs, like tech and agency businesses.

Bootstrapping tips

Maintain an income stream. Because you’re using your own money, focus all your efforts in making your first sales (or getting your first clients). The income stream lowers your risk of cash flow failure. Alternatively, keep your 9-to-5 or have a side-hustle that guarantees you extra income.
Avoid getting into debt. Unless you have a solid business model that specifies how you earn revenue to cover costs, avoid using your credit card for payment. You may think you’re saving money by delaying payment, but the interest is hefty if you miss it. The same goes for any kind of interest debt.
Join a community for business bootstrappers. Connect with others on Facebook groups, Quora, and external events to hear bootstrapping advice. Learn from their failings and successes.

Apply for business loans

Pros	Cons
Low-interest rates Fixed monthly payments Good for your business credit Can build a professional banker relationship	Piles of paperwork Patience is needed (long wait time) You need to have strong credit Be prepared to offer some of your assets as collateral

Business loans are a traditional source of funding for startups. Your company is obligated to repay according to the loan’s terms and conditions. Before approaching a lender, check out the examples below and consider the loan that best caters to your financial needs.

Common types of business loans

Business lines of credit

Business lines of credit are approved based on your credit score and revenue. You can start receiving funds up to your credit limit. Payment is flexible because interest depends on the money you borrowed. While business lines of credit don’t need collateral, expect added costs for maintenance and draw fees.

Business credit cards

These pertain to the lines of credit that you can draw from and repay whenever you need it for your business expenses. Like credit lines, it won’t require collateral but imposes high costs and extra fees. Businesses that have a business credit card need to pay a minimum monthly payment.

Microloans
Microloans are small, short-term loans with a low-interest rate. They cater to new startups with very low capital requirements, as well as businesses in underprivileged communities. Some microloan lenders offer extra services like business training or consultation.

Term loans

A term loan is cash you receive upfront and repay with interest over a period of one to 10 years. They require real estate or equipment assets as collateral. However, this will give you access to high loan amounts that you can immediately use for your business.

Equipment loans

This is recommended for businesses that need equipment right away. The term of equipment loans depends on the estimated lifespan of the equipment you wish to buy.
In general, equipment loans are applied to equipment that retains value, including:

Manufacturing equipment (laser cutting machines, sheeting/wrapping machines, etc.)
Large commercial printers
Computer servers
Restaurant equipment (ovens, freezers, etc.)

Merchant cash advances

Merchant cash advances are an alternative to a term loan. This type is a cash advance of your future credit card sales. You receive the cash upfront like term loans but your repayments are based on the balance of your credit card account. Merchant cash advances charge a daily or weekly debit from your credit card sales.

Personal loans

Personal loans are used to finance your personal projects — including your small business. Business loans and personal loans are structured similarly. But their key difference is that business loans let you use your company’s financial reputation for approval.

Personal loans, on the other hand, are evaluated based on your personal income and credit score. They also offer a more flexible application process with no collateral required.

How do you apply for a business loan?

Banks are the most common establishments for loans. Other financial institutions — including P2P lenders, credit unions, or loan companies — offer smaller loans directly to entrepreneurs.

To prepare for the application process, get started with the following:

The amount you wish to loan. It may sound obvious, but startup owners often find themselves stuck determining the number of funds they need and the reason for it. Make a list of business-related points you’ll need the funding for, including equipment, inventory, or to increase your working capital.
Review your credit score. Have a credit reporting agency review your personal credit history. This will give you time to check for discrepancies and have them corrected before applying for a loan.
Business plan. To be approved for a business loan, you need to prepare a reputable business plan. Financial business plans include the following sections:

Business Profile
Executive Summary
Marketing and Sales Plan
Financial Plan: revenue, direct costs, personnel, and expenses
Loan specific requirements: loan amount request, collateral, and loan repayment

Apply for government loans and grants

Pros	Cons
Great for your business reputation Grants do not require repayment	Proposals demand research and planning Reimbursements can take a long time Paperwork and processing are time-consuming and energy draining

Government grants work as financial assistance to businesses that met the requirements. You will often find them in government websites and organised in categories. A good example of this is Australia.

Its government provides grants, low-interest loans, and tax and tariff concessions. You can search among the categories provided on the government website. Then choose the grant that best suits you and meet the requirements.

The categories usually involve:

Business startup
Marketing and sales
Proof of concept
Importing or exporting
Equipment funding
Employment assistance
Disaster fund
Expansion fund
Health and safety improvements

Seems easy. But specific and strict requirements come with pursuing government grants — and you must follow them to a T.

More than 96% of businesses in the ASEAN region are small and medium businesses. This statistic drives ASEAN countries to offer pro-business policies, programs, and funding.

Singapore, for one, provides extensive funding for projects involving process improvement and product development. These grants act as financial support for SMEs in the island country:

Capability Development Grant
ACE Startups
Spring Startup Enterprise Development Scheme
Interactive Digital Media’s IDM Jumpstart and Mentor
IE Singapore’s Global Company Partnership (GCP) Grant
The International Expansion Grant

Malaysia, meanwhile, launched the SME Masterplan in 2012. This program helps expand, upgrade, diversify, or modernize startups and existing businesses. The available funds and loans include:

Soft Loan Schemes for Service Sector
Young Entrepreneur Fund
Business Start-Up Fund

Indonesia’s initiatives focus on sustainable economic growth of grassroots SMEs. The Ministry of Cooperative and SME Startup Incubator Program makes this possible, providing business opportunities for local businesses. Its Credit for Businesses program provides credit, working capital, and investment financing schemes.

Lastly, the Philippines leans more toward providing loans to businesses over giving away grants. It offers business loans through the Business Development Loan Facility. Members of the Government Service Insurance System also enjoy Enhanced Conso-Loan Plus.

Conduct a brilliant campaign for crowdfunding

Pros	Cons
You get to raise money for your capital when the campaign ends If you’re marketing towards a younger crowd, you get to connect a big chunk of your target market through crowdfunding websites Investors are validated by the reward system of crowdfunding sites	Backers only fund projects that interest them leading to fewer opportunities for business-business transactions Not the ideal platform if you need a large capital; usually works for projects that only need $100,000 or less Projects have fixed goals, deadlines, and rewards; changing any of these in the middle of the campaign might damage your reputation

If you have a unique product or service, you can fund your project through crowdfunding.

Crowdfunding websites launch thousands of campaigns online. When marketed correctly, they attract investors — individuals or groups interested in whatever product or service that catches their radar.

So what makes a successful crowdfunding campaign?

✓ It all starts with a great concept. Crowdfunders are typically young, tech-driven individuals looking for an interesting project. That said, crowdfunding websites won’t work for law firms or accounting services.

✓ Marketing, marketing, marketing. Marketing! Need we say that again? Build an email list before even launching your project. You can also share your business idea on social media to build up anticipation.

✓ Tell your story. If possible, provide an interesting video to share your story with the world. This way, whenever someone clicks on your campaign video, you already get 2-3 minutes of their attention.

✓ Offer rewards. You’d don’t need to give away half your inventory to 10 dollar backers. Simple ”thank you” gifts such as discount coupons or novelty items are a great way to show your gratitude.

Popular crowdfunding sites

Kickstarter — one of the most popular crowdfunding sites around. Kickstarter supports creative projects such as design and tech, illustration, games, crafts, music, publishing, and film, among others.

Indiegogo — works like Kickstarter but supports charitable projects, categories include tech and innovation, creative works, and community projects.

Crowdfunder — great for businesses that look for angel investors. Currently in beta mode. Businesses can add their company details as a starting point.

Seek venture capitalists and angel investors

Venture capitalists

Pros	Cons
The venture capitalist provides you with the capital you need for your startup You have access to the firm's resources and expertise You expand your network with industry leaders in your field	You don't have full control You can get carried away with spending You and the investment firm may have incompatible priorities, goals, and values

Venture capitalists fund concepts with a chance of excellent return on investment. For example, they tend to back projects in the IT or telecommunications industry for their growth potential. For small businesses and startups, getting the attention of a venture capitalist is a big deal; which is why they pour large amounts of time and effort into their proposals.

Angel investors

Pros	Cons
Ideal for small and medium enterprises Startups that impress angel investors get fast funding Angels offer their knowledge and expertise in the industry Angel investors give high-risk ventures a shot	It's difficult to meet with angel investors due to their full schedules They don’t offer as much as other funding sources Most of them expect around 25% ROI for their investment Angel investors tend to challenge your authority

Angel investors are great for startups in the medical, tech, software, telecommunications, and other similar fields. Like venture capitalists, angels are particular with a business’s potential for high growth.

A majority of angel investors (or “angels”) are retired executives — so you can gain management tips, a network of contacts, and other industry-based knowledge that can guide your startup in the right direction. Angel investors also expect a seat on the board and a say in the business’s course and management.

Take advantage of love money or patient capital

Pros	Cons
No need for introductions or business meetings You can keep your pitch less formal since you are presenting to family and friends There’s no pressure with reaching business milestones	Investors most likely work in other fields and have no knowledge or expertise to contribute to your business There may be tax issues when no proper loan documentation. Since loans and gifts have different tax implications, your loved one may suffer from tax liability when there is not enough documentation for the loan. When the business fails, there’s also a risk of failed relationships

Love money is funding provided by your loved ones. Though it has no fixed repayment terms, love money should be your last resort when there are no other financial options available. It's not always a good idea to mix business with personal relationships. But should you have no other choice, set out clear guidelines and expectations before acquiring the money. Make sure both sides are 100% onboard to prevent any future problems.

Conclusion

Acquiring funds for your small business involves endless networking and dozens of proposals. It helps to identify the investors or lending agencies that can best help your startup during its early stages before you even start drafting proposals.

It’s also wise to identify if the core values of your investors — particularly those with direct influence on your organizational management — coincide with your own as this is a major factor as your business grows.