Whether you have a startup or an existing business, your main goal is to grow your company. Entrepreneurs know that while some of their business growth can come organically, at some point you’ll ask yourself, “how do you get funding for your small business?”
That’s when small business funding options can potentially grow that business idea into a viable company. For example, credit cards, grants, crowdfunding platforms, small business loans, peer-to-peer lending, and other funding options can help you take your business to the next level. Despite the long list of ways to fund your business, it can be difficult to know which funding options are available for you and could optimize your growth potential.
That leaves many entrepreneurs with the same concerns about financing their business. Here are 20 commonly asked business funding questions and answers to help you develop the best funding strategy for you.
To make this easier to navigate, I’ve broken these questions down into six categories:
- General business funding
- Funding with credit cards
- Funding with business grants
- Traditional and online lending
- Using crowdfunding
- Other financing options
General business funding
How good must my personal and business credit scores be to secure financing?
Your personal credit score determines personal lending scenarios like mortgages and credit cards. It’s calculated through factors like payment history, types of credit used and amount owed. But, it also determines business credit and financing approval for small business loans, grants and funding from venture capitalists and angel investors. If you have an existing business, you most likely also have a business credit score.
For example, the Experian Intelliscore Plus business credit score ranges from 1 to 100 and predicts seriously derogatory payments. Low to medium risk is a score of 51 to 75 while the lowest risk is a score of 76 to 100.
Both of these scores can yield potential business funding. Experian’s personal credit scoring system rates those with 700 and above as good candidates for credit. Those with 800 or above are deemed as excellent candidates.
How can I improve my credit score to improve my chances of securing financing?
Before seeking business funding, you may have to take steps to improve both your business and personal credit scores.
You may need to start by:
- Cleaning up any mistakes on your credit reports
- Paying down debt
- Or applying for some credit options made for those with bad credit like a secured credit card
Other ways to build credit include:
- Paying your bills for your credit accounts on time
- Using a moderate amount of the credit line available to you
- Regularly monitoring your credit report to learn what changes you need to make
During a Lend Academy podcast, Self Lender CEO James Garvey discussed how the company provides another way to build your credit.
“The idea for Self Lender was — what if I could partner with a bank and basically make you a loan where you have to put the money into a brand new CD? So it’s basically like a small $500 loan, a 12-month installment loan at roughly 10 to 12% interest, where that money goes into a $500, 12-month CD that pays you a tenth of a percent of interest. So the idea is that we’re lending you money, you have to save it and the beautiful thing is your start date or stop date, that equal payment, it feels really like a savings plan that builds credit and not like a CD-secured installment loan which is really difficult to save.”
Should I take any financing offered?
No, some of the financing offered may not be beneficial. Before accepting a finance offer, you need to consider what the investor or lender is expecting from you and whether it fits your strategy and ability to deliver repayment or a return. The investor may expect to be involved in your business, or retain partial control.
If financing comes with those expectations, you need to think about whether you want the money that much. In these cases, it may be better to wait for other financing options.
What are the advantages and disadvantages of bootstrapping?
By bootstrapping, you are essentially funding your own business by earning the money necessary to put into your startup. That means taking on side jobs or using the earnings from a full-time job and savings to build out your business.
There are many advantages to bootstrapping your own business:
- You won’t have to use your personal credit score as a basis of funding.
- You’ll have complete control over the business.
- You won’t struggle to repay a debt or deliver a return for an investor.
However, there are also potential disadvantages. For example:
- It could take you longer to get the funds and start the business.
- You may have less time to focus on the business due to the responsibilities of a full-time job or side hustles.
Funding with credit cards
Why should I fund my business with a credit card?
Credit cards can be an easy way to get access to credit, offering a way to purchase certain items and pay for them anywhere from 30 to 90 days or longer.
While it is better to pay a credit card off each month, it is possible to extend repayment on items purchased within the credit limit provided. Often, these credit cards come with perks that add value, such as points to put towards travel or product. The card could also offer cash back rebates, saving you additional money.
Do I need to have a business credit card or will a personal credit card serve just as well?
When opting to finance your business with credit cards, it is better to use business credit cards and keep your personal credit cards for personal purchases.
Experian noted that it is important to separate these two parts of your life. Otherwise, you could put your business at risk should anything go wrong, leading to creditors who may come after business assets to recover credit losses or vice versa.
Funding with business grants
What are the benefits and drawbacks of applying for grants?
A key benefit to pursuing business grants as funding is that the grants do not need to be repaid. Also, the organization that provides the money is not involved in your business. Business startup grants include those offered at federal, state, and municipal levels for a wide range of specialized businesses.
However, because the money is essentially “free,” you will need to do considerable work to get these grants, including creating a detailed business plan and roadmap for success. They can also be hard to win because there are so many entrepreneurs vying for them.
Where can I find grants?
Are there grant options for those with bad credit?
A great many options can accommodate those with less-than-stellar credit. The organizations backing these grants are looking to help entrepreneurs create positive change by giving them the necessary funding to improve their fiscal responsibility.
Traditional and online lending
What kind of collateral do I need to have in order to get a business loan?
While the type of collateral required for a business loan may vary between lenders and loan types, there are some commonly approved types of collateral.
With a business loan, this collateral can include:
- Real estate
- Specialized equipment
- Accounts Receivable
- Valuables and collectibles
- Investment accounts
Besides the repayment time, what is the difference between short-term loans and longer-term loans?
A short-term loan is often funded within 24 hours and offers minimal application time and very few requirements. These are also known as working capital or equipment leasing loans. The amounts are smaller, which means a small business does not become burdened with long-term debt to try and pay off.
A longer-term loan tends to be for a much larger amount of money and therefore requires more documentation and review before approval. These types of loans also come with significantly more interest.
Is it better to get a business loan online, go to a bank, or go to the Small Business Administration?
Each of these funding options have certain advantages and drawbacks based on the entrepreneur’s funding need, business stage, and financial standing.
A traditional bank offers small business loans, but may not be as comfortable with the risk levels associated with startups. For those startups, an alternative online business loan might be a better option.
The Small Business Administration is also more comfortable with startup needs and capabilities. Research all the small business loan options available to you before making a decision.
Why is crowdfunding a beneficial funding source?
Crowdfunding allows you to raise your funding from a large group of people. While they aren’t investors, they do have an interest in your product.
These supporters will provide you with money for your business in return for some type of gift or perk. This might include advanced access to your product or services, a mention in your business, or an in-person meeting with you.
Crowdfunding is a low-risk way to raise money. You keep control over your company, and you are under no obligation to repay crowdfunders should your business not launch. However, you still want to make sure you deliver on your promises. Take the time to fully understand crowdfunding obligations before you take this route.
What is the difference between equity crowdfunding and business crowdfunding?
In 2015, the Securities and Exchange Commission adopted final rules to allow crowdfunding. According to a Small Business Administration report, equity-based crowdfunding allows “businesses to raise up to $1 million in debt or equity in a 12-month period from individual retail investors. Most notably, it requires less paperwork than some other similar capital-raising options, such as filing to become a public company.”
Unlike regular crowdfunding, where you give out a product or gift, equity crowdfunding involves actual equity or financial return for the contributors. In this case, you may also need to provide more compelling reasons and a specific roadmap to illustrate how you will generate this return for your “investors.”
How do I determine which crowdfunding platform to use, such as Kickstarter or Indiegogo?
There are specific crowdfunding platforms for general business fundraising as well as separate ones for equity crowdfunding. Within each category of crowdfunding, the platform caters to certain types of business segments or interests.
For example, there are other crowdfunding platforms that are specifically for nonprofit organizations. Research the different options available to help you make the right choice.
Other financing options
Should I get funding from family and/or friends?
There are definite benefits to getting funding from family and/or friends. Since they already know and trust you, they are more likely to believe in what you’re doing and want to help.
They may also not have very stringent repayment terms. Friends and family may consider a low or no interest loan or even equity in your startup in exchange for the money. They are also less likely to put pressure on you for a quick repayment.
Even with all those advantages, this is a risky move. You need to make sure you pay them back or deliver on expectations. Failure to do so could damage these important relationships.
What is peer-to-peer lending?
Also known as P2P lending, you can borrow money from another person instead of going to a bank or credit union. Borrowers connect with investors through a peer-to-peer lending platform, which in turn reduces fees, restrictions and funding time.
What is the difference between an angel investor and a venture capitalist?
Angel investors are individuals who invest their own funds in smaller startups that are just starting out.
Venture capitalists are larger companies and business entities that collect funds from many different investors and corporations. VCs invest that money into startups and other businesses.
Both offer equity funding and look for a return on the risk they are taking by funding these startups. Within each category, each type of investor may have a varying interest in getting involved with the startups they fund. Some are also interested in mentoring or working within the company.
What can I do to secure funding from a venture capitalist or angel investor?
There is no guaranteed way to get funding, but there are some steps you can take to improve your chances.
First, identify those investors interested in, or familiar with, what you do. They should also share your values and have a track record of helping similar startups. There are numerous online directories that can help you complete this research.
Next, have a detailed business plan to show investors how you plan on achieving their desired return. Be prepared to have the investors complete a due diligence review. They should scrutinize your management team, market, products or services, and financial statements.
Finally, know what type of terms you want. Also, decide what you might compromise on should an investor want to change those terms.
What happens when I need more funding? Is it easier to get the next round of funding?
With most types of funding sources, it’s possible to undergo rounds of funding. For example, with an angel investor or venture capitalist, a startup can have a seed round followed by Series A, B and C. They can also move into the funding world of an initial public offering (IPO) of stock.
Yet, when it comes to something like friends and family, a business loan, or crowdfunding, there are very few instances where you can return and ask for more money.
Even with the funding sources where rounds of money are more commonly offered, a startup has to produce results that indicate they are worthy of additional funding. You’ll need to track how you spend your funding and look for ways to show quantitative progress before you can get more money.
Final thoughts on business funding
While these are just some of the more common questions about business funding, this list is not exhaustive. However, you can use this guide to help you make informed decisions about using funding to grow your business. Be sure to follow along with our blog to get more answers to questions about small business and your credit.
About the author
Dion Rostamian is a longtime digital media consultant and journalist and small business expert living in San Francisco. He’s written for Venturebeat, USA Today and FastCompany.