01 September A Complete Guide to Small Business Funding
Starting a small business can be an exciting and rewarding experience, but it can also be challenging and stressful, particularly when it comes to securing funding.
Small business financing can come in many forms, and choosing the right one for your business can be confusing.
To guide you on your process of securing funding, we’ve provided a comprehensive overview of the various small business funding options available to entrepreneurs, including their pros and cons.
Self-funding, also known as bootstrapping, is the process of using personal savings or assets to finance your business.
This is one of the most common forms of small business financing and is particularly popular among entrepreneurs who are just starting their business.
Self-funding can give you complete control over your business without having to worry about repaying debt or sharing profits with investors.
Pros of self-funding:
- You have complete control over your business
- You don't have to repay any debt or share profits with investors
- You can start your business right away without waiting for funding
Cons of self-funding:
- You may not have enough personal savings to fully fund your business
- You may need to sell personal assets to raise funds
- There's a risk of losing your personal savings if your business fails
Friends and Family
Friends and family members can be a great source of small business funding. They can provide you with a loan, an investment, or even a gift to help get your business off the ground.
However, it's important to treat these relationships with care and to be transparent about the risks involved in investing in a small business.
- Friends and family may be more willing to invest in your business than traditional lenders
- You can often negotiate favorable terms with your friends and family
- You may be able to receive funding quickly without going through a lengthy application process
- If your business fails, it can put a strain on your personal relationships
- You may feel pressured to repay your friends and family quickly, even if your business isn't profitable yet
- Friends and family may not have the expertise to help your business succeed
Crowdfunding is a relatively new form of small business funding that has become increasingly popular in recent years. It involves raising money from a large number of people, typically through an online platform like Kickstarter or Indiegogo.
Crowdfunding can be a great way to generate interest in your business and to get early feedback from potential customers.
- You can raise a significant amount of funding quickly
- You can generate interest in your business and get early feedback from potential customers
- You don't have to give up equity in your business or repay debt to investors
- Crowdfunding can be time-consuming and require a lot of effort to promote your campaign
- You may not reach your funding goal, in which case you won't receive any funding at all
- You may have to give up a percentage of your profits or rewards to backers
Small Business Administration (SBA) Loans
The Small Business Administration (SBA) is a government agency that provides loans to small businesses. SBA loans are popular among entrepreneurs because they often have lower interest rates and longer repayment terms than traditional bank loans.
- SBA loans often have lower interest rates and longer repayment terms than traditional bank loans
- You may be able to receive funding even if you have limited credit history or collateral
- SBA loans can help you establish a credit history and build a relationship with a bank
- The application process for an SBA loan can be lengthy and complicated
- SBA loans often require a personal guarantee, which means you are personally liable for the loan if your business fails
- You may have to provide collateral to secure the loan
Business Bank Loans
Business bank loans are a traditional form of small business financing that involves borrowing money from a bank. To qualify for a bank loan, businesses usually need a good credit score, a solid business plan, and a strong track record.
- Bank loans can be used in a variety of ways to grow and expand a business. Banks are unlikely to interfere once the business is approved and as long as they make their payments.
- Banks generally offer small-business loans with lower interest rates with rates averaging from 3.19% to 6.78% according to the Federal Reserve.
- Banks often have more lending power than credit unions or online lenders, and loans are often available in amounts up to $1 million or more.
- Banks often require a credit score of at least 660 for approval, and some require a score of 700+.
- Bank loans have high maximum APRs of 25% or lower.
- Bank loans have slower approval time than online lenders and typically fund a loan within seven business days after submitting the application
Business Line of Credit
A business line of credit is most like a business credit card. Businesses receive a maximum balance and take money from that balance as needed. They then make a minimum payment based on the current balance of the loan.
Business lines of credit are popular with small business, but they come with their own set of weaknesses, hassles, and risks.
- They allow businesses to pay for only what they need. With a line of credit, the maximum balance is the highest estimate of costs they need to cover. Businesses only use and pay interest on what they need.
- A business line of credit helps improve cash flow by providing a pool of funds to pull from whenever you need it.
- They are an effective way to build a relationship with the lender by demonstrating the business can responsibly manage credit. This can lead to credit line increases or make it easier to renew the line when the draw period ends.
- Business lines of credit come with many fees including origination fee, monthly maintenance fee, annual fee, draw fee, payment processing fee, and more.
- Interest rates tend to be higher than traditional business loans with average APRs ranging from eight to sixty percent or higher.
- Business lines of credit loan terms often have short repayment terms, from twelve weeks to eighteen months.
Investor or Equity Financing
Equity financing is the process of raising capital through the sale of shares. By selling shares, a business effectively sells ownership in its company in return for cash.
Equity financing comes from a variety of sources including friends and family, professional investors, or an initial public offering (IPO) to prove needed capital.
- Equity financing results in no debt as investors seek a return on their investment rather than repayment of a loan.
- It’s a better option if a business cannot obtain a loan.
- Equity financing offered by angel investors and venture capitalists can offer access to outstanding business expertise, insight, and advice
- Investors will expect a piece of the businesses’ profit.
- Businesses will share ownership with investors and can have less control of their company.
- The higher rate of return demanded by investors can easily exceed that charged by traditional lenders.
Grants are one of the best ways of funding a business idea because they do not have to be repaid. And some grants offer a large amount of money, depending on the company’s idea or purposes of investment.
- Grants are free money and do not have to be repaid.
- Once a business has been awarded a grant, they are more likely to receive others.
- Grants are accessible and businesses have access to a lot of information about where, how, when, and who to obtain grants from.
- Applying to grants is a time-consuming process requiring a lot of research and paperwork.
- Grants are difficult to receive as you are competing with thousands of small and online businesses.
- Grants often come with restrictions, conditions, and contingency plans on how the business uses the money. And, once the business gets the money, they must stick to their original plan.
By using capital advances, businesses sell a portion of their future sales to a third party. Their business data is examined and, based on previous sales, a forecaster future sales amount is offered.
- Businesses receive quick capital as funding usually occurs within days.
- Depending on business performance, capital advances could be up to $1 million.
- Capital advances have little paperwork, no collateral requirements, and high approval rates.
- APRs range from 25-40% – a much higher interest rate than traditional bank loans.
- Capital advances are not loans so they cannot help businesses build credit.
- Capital advances have high default penalties. If a business falls behind on their payments or shuts down their bank account, high default penalties are tacked onto the balance they owe.
Yardline’s Ecommerce Funding
It can be extremely challenging for ecommerce businesses and businesses owners to know what type of funding they need and where to look for it.
That’s where Yardline steps in. We believe you shouldn’t have to jump through hoops to find funding for your business and succeed.
With one simple and easy application, Yardline matches ecommerce sellers with the best funding options available, including:
- Small ecommerce business loans
- Revolving lines of credit
- Revenue based financing
- Personal and business credit cards
- PO and invoice financing
- Inventory financing
- SBA Loans
And that’s just the beginning.
Yardline's ecommerce funding solutions offer small businesses instant access to the best rates and terms to meet their business funding needs. Get rates as low as 7.49%* APR and up to $20mm in funding for your business.
If you’re ready to order more inventory, launch new products, and run more ads with Yardline's extensive funding solutions, apply for funding today and watch your business grow.
*Rates as of March 1, 2023