How to Fund a Small Business
Finding the right way to finance your business is a critical step for any entrepreneur. Whether you’re just starting or looking to expand, it’s essential to know how to fund a small business while balancing both the potential benefits and risks. From tapping into personal relationships to exploring crowdfunding and traditional financing options, there are numerous ways to secure the capital you need. In this article, we’ll explore funding options such as friends and family, crowdfunding, small business loans, revolving lines of credit, revenue-based financing, personal and business credit cards, purchase order and invoice factoring, and SBA loans.
1. Friends & Family
One of the earliest steps many entrepreneurs take when deciding how to fund a small business is to turn to friends and family for financial support. This option allows you to leverage personal relationships to raise capital without going through formal financial institutions. However, it’s important to approach this option with care to maintain both business and personal boundaries.
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Pros: Borrowing from friends and family can offer more flexible terms, often with lower or no interest rates compared to traditional lenders. It can also help you get started when other financing options are not yet available.
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Cons: The biggest drawback is the potential strain on personal relationships. If the business fails or experiences financial setbacks, it could lead to misunderstandings or tension. To avoid this, ensure clear communication, formal agreements, and transparency about the risks involved.
While seeking funds from loved ones can be effective for funding a small business, make sure the terms are clear, and everyone is on the same page to protect the relationship.
2. Crowdfunding
In the digital age, crowdfunding has become an increasingly popular way to raise capital. Crowdfunding involves collecting small contributions from a large number of people, typically via internet platforms like GoFundMe or Kickstarter. Entrepreneurs, creators, and business owners can pitch their projects to a broad audience and gather financial support without the need for traditional lenders or investors.
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Pros: Crowdfunding is great for businesses with unique or innovative products, as it allows you to validate your idea and build an audience before launching. Additionally, you don’t need to give up equity or take on debt in exchange for contributions.
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Cons: Success isn’t guaranteed—many crowdfunding campaigns fail to reach their funding goals. Moreover, it requires significant effort to market your campaign and gain visibility, especially in a crowded space.
Crowdfunding is a solid option for entrepreneurs wondering how to fund a small business without relying on conventional financing methods.
3. Small Business Financing Options
Beyond personal connections and crowdfunding, there are various formal small business funding options available for entrepreneurs. These methods can offer the capital you need to grow, purchase inventory, or manage cash flow. Here are some common options:
Small Business Loans
Small business loans are one of the most traditional forms of financing. Offered by banks, credit unions, and online lenders, these loans provide a lump sum of money that must be repaid with interest over a specified period.
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Best for: Businesses looking to make significant investments, such as purchasing equipment, expanding operations, or covering large operating costs.
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Pros: Provides access to larger amounts of capital with structured repayment plans.
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Cons: Requires strong credit and a solid business plan for approval. Interest rates and repayment terms may vary depending on the lender and the loan type.
Revolving Lines of Credit
A revolving line of credit gives businesses access to a pre-approved credit limit, which they can draw from as needed. Once repaid, the credit becomes available again.
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Best for: Businesses that need flexible access to capital for ongoing expenses or managing cash flow gaps.
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Pros: Only pay interest on the amount borrowed. Offers flexibility in managing cash flow needs.
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Cons: Requires strong credit to qualify, and interest rates can fluctuate based on market conditions.
Revenue-Based Financing
Revenue-based financing is a loan option where businesses receive upfront capital in exchange for a percentage of future revenue until the loan is repaid.
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Best for: Businesses with steady revenue streams that want to avoid traditional debt repayment schedules.
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Pros: Repayments fluctuate with business revenue, which can ease the financial burden during slower months.
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Cons: Can be more expensive than traditional loans in the long run, and repayment can last longer if revenue is inconsistent.
Personal and Business Credit Cards
Using personal or business credit cards is a common short-term financing method for startups and small businesses.
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Best for: Covering small, everyday business expenses or managing short-term cash flow needs.
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Pros: Easy to access and can help with urgent expenses. Some business credit cards offer rewards or cash-back incentives.
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Cons: High-interest rates if balances aren’t paid in full each month. Relying too much on credit cards can lead to mounting debt.
Purchase Order and Invoice Factoring
Purchase order (PO) financing and invoice factoring are financing solutions that allow businesses to leverage unpaid invoices or confirmed customer orders to receive cash upfront.
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Best for: Businesses experiencing growth that need capital to fulfill large orders or manage delayed invoice payments.
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Pros: These financing options provide quick access to funds without requiring significant collateral or a lengthy approval process.
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Cons: Fees can be higher than traditional loans, and profit margins may be reduced as a result.
SBA Loans
SBA loans are long-term, low-interest loans backed by the U.S. Small Business Administration. These loans are provided by banks and other lenders in partnership with the SBA.
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Best for: Established businesses that need large amounts of capital for expansion, equipment purchases, or working capital.
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Pros: Lower interest rates and longer repayment terms than many other loan types. SBA loans can provide the funding needed for substantial investments.
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Cons: The application process can be time-consuming, with extensive documentation and a longer approval period.
SBA loans are an excellent choice for businesses that are ready to scale and need significant funding but want favorable loan terms.
Apply for Funding with Yardline
Whether you’re considering small business loans, revolving lines of credit, or other financing options, Yardline offers the best rates and terms to help businesses grow.
Apply for funding a small business today and get approved in as fast as 24 hours. Click here to get started and see how Yardline can help your business thrive!