Funding your small business: Your guide to loans, funding, grants and credit

People seek funding for small businesses for many reasons — they want to start, grow or go all in. If you have the right foundation and know your options, you can make more informed decisions for your business’s future.

According to the New York Fed, only 44% of small business owners obtain funding from a bank. Banks are not your only option.

We’ve broken down your options for funding your business. Our guide includes the following:

Business startup cost basics
Business plans
Debt vs. zero-debt financing
Zero-debt financing options
Debt financing options
SBA loans
Small business loan requirements
How to make your business stand out to investors and lenders

Business startup cost basics: What are you paying for upfront?

Showing a business financing entity, like a bank, that you have a sound foundation for your business will increase the likelihood of getting approved for funding.

You may only need to spend on some of the expenses below before receiving funding, but you should plan for future efforts. For example, you may not be able to afford inventory without financing, but you should be able to forecast how much you need to cover inventory.

Licensing, permits, taxes and other legal requirements

There are several steps to establishing your business as legitimate and reducing your liabilities:

Get a business license: Register with your state entity.
Establish a business structure: Most new businesses start as either sole proprietorship, partnership, LLC, or corporation. You can usually define your business structure on your business license application.
Ensure all industry licenses are up-to-date: Many industries require individual licenses, so take the time to determine that you and your business are properly licensed.
Create customer forms: Get with a lawyer and determine if you have the appropriate waiver and liability forms to protect your business.
Keep your eyes on taxes: Most new business owners are shocked after their first tax season. Keep your eyes out for tax deductions, and plan on paying quarterly taxes to make it more manageable.

Find a space to do business

You have a lot of options when it comes to location. You can keep costs low by doing business from home or online. These options are likely the most affordable but aren’t always the right fit for every business.

If you’re providing a service, it may be worthwhile to start providing mobile services when you first begin.

You may need to rent a space, and that can require funding to get started. If that’s the case, do your homework on the ideal location — research rent to include this in your future loan application or pitch.

Equipment

Create a list of everything you need to start your business on Day 1. This includes the tools to provide your service and the tech needed to run your business, like cash registers and even cleaning supplies.

You can buy the bare minimum to get started. Remember, the less you spend, the more you minimize your risk for starting a new business.

Inventory

Do you have enough inventory to fulfill your first few sales if you’re in a retail space? You do not want to overbuy inventory and then take a loss. But you want to build a good reputation as a business that can quickly fulfill orders.

Marketing

Marketing is the plan you execute to get more customers. So at the beginning stages of forming a business, you must have a basic marketing plan.

You can create a simple website for your company to help you describe your brand, products and services. From there, you can decide what online and traditional marketing makes the most sense for your business.

Banking, accounting and payroll

You need a financial system in place before starting a business. This includes a bank account, an accounting system, a way to receive payments and a payroll system.

If you’re seeking funding for your business, you also need to plan for growth. When you establish a financial infrastructure for your business, you can better forecast growth.

Business insurance

Insurance protects your business and assets. Most new business owners start with general liability insurance. General liability insurance covers:

Slips and falls
Property damage
Legal fees
Medical payments
Advertising injury
Other issues that may affect non-employees of the business

Every business is different, and many business owners find they may also need other forms of insurance like:

Read more: Types of business insurance

Business plans

Many new business owners gloss over the business plan in their heads. They feel fully engaged with their business daily — why sit down and write about it?

But a business plan is often the first requirement for many funding options listed below. And a well-written business plan is the difference between getting approved for a loan, earning a grant or getting rejected. Here’s what you need to write a simple business plan:

Executive summary: Explain your business and what will make it successful. This includes descriptions of products/ services, leadership and plans to grow.
Company description: Describe your company by explaining how you solve your customer’s problems. Explain how your company will achieve this.
Market analysis: Your market is your customers, but also how your competitors serve the market.
Organization and management: Explain company structure, legal structure and leadership organization.
Marketing and sales: Explain how your will gain and retain customers.
Financial projections: Tie measurable goals into your financial outlook. Use past performance to form these goals. If you seek funding, explain how much money you need. Connect this need to money use.

Debt vs. zero-debt financing

There are many ways to fund your small business, but you can classify financing into two categories:

Debt financing: You borrow money and must pay it back with interest. Even if your business isn’t successful, you are still beholden to the money.
Zero-debt financing: An entity gives you money without considering it a debt. This often looks like an investment in exchange for an equity stake.

Zero-debt financing options for small businesses

Starting a new small business is scary — you multiply that feeling when you take on debt. Consider some zero-debt financing options before applying for another credit card.

Self-funding or bootstrapping

As we outline the funding options for small businesses, you’ll notice that funding almost always comes with strings. But when you’re self-funding your business, you take on the entirety of the risk. But you get to enjoy all of the rewards as well.

Self-funding requires some creativity if you’re not independently wealthy. Many people start businesses as side hustles and use their paychecks to help fund their businesses. You can also leverage assets like retirement, savings and investment accounts.

Bootstrapping your business also helps you keep an eye on expenses. You’re likely to be more considerate with money if you’re using your own.

Venture capital, angel investors and equity financing

If you’ve been scouring entrepreneurial websites and blogs, you’ve undoubtedly heard the term “VC-backed,” which simply means that a venture capital firm is funding the business. Venture capital investors give money in exchange for company equity (or shares).

Venture capital firms are known for infusing a lot of money into the right startups, and the funding can help launch your business.

Angel investors follow the same principle, but these are typically individuals (not organizations) who invest in certain companies. Angel investors usually give out smaller amounts of money, but this can still be a lot of money to a prospective small business.

You can use the SBA investment finder to see some options for equity financing.

Crowdfunding

You’ve no doubt heard a Kickstarter success story about a small business or startup that was able to make it big from receiving early crowdfunding money. Crowdfunding allows you to ask anyone to contribute as much (or as little) money to your cause.

There’s a variety of crowdfunding websites out there, so read the fine print when picking one. Some require you to provide equity, rewards, or even pay back the funding. Not all crowdfunding options are debt-free.

Friends and family

You will sometimes need to repay loans from friends and family, but other times these loans are gifts or investments. The key is to communicate these expectations beforehand and be sure all parties understand the conditions of the investment or gift.

Getting money from friends and family can damage relationships if you handle the process poorly, so consider this before moving forward.

Grants for small business

Grants are small amounts of money awarded to individuals or businesses after going through an application process. Small business grants are considered seed money, or money that helps your business grow. Anyone can apply for a grant, but you can also hire specialized grant writers to help with your application.

You do not have to repay grants, but you may have to check in with an organization to show how you used the money. Grants are also competitive and have a time-consuming application process.

Small business grants often have a specific candidate for them. Try narrowing your search to something specific that fits your circumstances. Some examples include:

Government grants
General small business grants
Industry grants
Diversity grants
Veteran grants

Debt-based financing options for your small business

Many traditional funding options require you to take on debt: get a form of a loan, pay interest on that loan and eventually pay off the loan. But these are also straightforward and accessible options for most small business owners.

Traditional loans: personal and business loans for your small business

Traditional loans come from applying to a bank for a sum of money, the bank approving or denying the application, and offering terms to the loan, including interest rates you choose to accept.

Many new businesses will have difficulty getting a favorable loan or approval, but you can also apply for a personal loan. Most new businesses are structured as sole proprietorships and are considered pass-through entities. You can use your personal credit score and standing with the bank to qualify for a personal loan. Then use this capital for your business.

Read more: Types of business loans

Business line of credit

A line of credit acts like a credit card. You get approved for a set amount from a lender and you spend the money until you reach the limit. You pay off the amount that you borrow with interest.

You can pay your balance if you reach your credit limit and can’t take out any money. Then borrowing can continue.

Credit cards

A credit card may be the right choice if you’re building a small business and looking for a quick way to access startup cash. Credit cards are easy to apply for, and you can shop for a good rate.

If you’re using a credit card to fund your startup costs, look for one that offers an intro 0% interest rate. But beware, the interest rate can increase in size after this introductory offer expires.

Credit cards are not a long-term solution, and it’s unwise to fund your business long-term with this option.

Online lenders

Online lenders may approve you if you don’t have the strongest credit score or haven’t been in business very long. Read the fine print because online lenders can have fees and high-interest rates.

Microloans

Many lenders and investors have microloan programs that don’t feel “micro” to your small business. For example, you can get approved for an SBA microloan or up to $50,000.

Microloans are usually for underserved groups, and they are often mission-driven. If you have been struggling to get approved by a traditional lender, consider finding a micro-lender that fits your mission.

Types of SBA loans

SBA loans are loaned by a bank or online lender partly backed by the U.S. Small Business Administration (SBA). If you’ve ever shopped for a mortgage, it’s like an FHA mortgage, where different mortgage companies offer their version of a federally-backed loan.

Because the U.S. government backs them, there are more oversight and hoops to jump through, but an SBA loan can significantly affect your new business. SBA loans are handy for all small business needs: startup costs, real estate and expansions.

SBA 7(a) loans

SBA 7(a) loans are the most typical SBA loan. These loans max out at $5 million for working capital, expansion and equipment. SBA 7(a) loans have a variable interest rate, but you have more flexibility in using them.

SBA 504 loans

SBA 504 loans are used for larger purchases (like real estate), for $5 million, and have a bigger approval process. These loans typically have a fixed interest rate. Business owners use these loans for business growth and job creation.

SBA microloans

As the name implies, microloans are smaller than other SBA loans — up to $50,000. Intermediary lenders give out microloans. They each have their own requirements for obtaining their microloans.

Small business loan requirements

Gathering the typical requirements is a good idea as you shop around for the right business loan. This way, you can lock in a rate when you find the right loan. You’ll want to have on hand:

Formal business plan
Bank statement and relevant ratings
Balance sheet: A balance sheet that lists assets, liability and your owner equity is usually a requirement. Banks are looking for lower liabilities (or low debt).
Business cash flow: Banks want to be able to compare accounts receivable to accounts payable. They want to see that you’re netting enough cash to make payments.
Collateral or assets: Not all loans require that you pledge collateral, but having this ready gives you more flexibility.
Credit score

Personal vs. business credit: What’s a business credit score?

You’ve likely encountered your personal credit score if you have ever bought a car, applied for a credit card, or bought a house. Your personal credit score is linked to your ability to pay your bills on time, pay off debt and your general financial history. Many solopreneurs and single-member LLCs may even use their credit scores to apply for a personal loan for their business.

But if you apply for a small business loan to access more money, you need to use your business credit score. Your business credit score is linked to your business rather than your personal financial history.

A business credit score connects to your EIN, similar to how your personal credit score links to your social security number. Besides helping you apply for business loans, your business credit score is always tied to your business (not you).

This means you can increase the value of your business by having a good business credit score. You may appreciate this in the future if you choose to sell your business.

How to make your business stand out to investors and lenders

You must clearly and concisely communicate to investors and lenders so they understand your business, what you need from them, and how you will use their funding. Here are some places to start:

Have a business plan
Improve your credit score
Get your books in order
Have a clear mission that tells your story
Define an investment structure
Show investors what’s in it for them
Satisfy business loan requirements

Consider adding insurance coverage from NEXT

There’s no easy path to getting funding for your small business. You have to come up with a solution that works for you. Understanding your options allows you to pursue the right funding for your business.

You can help show investors and lenders you take your business seriously by adding insurance coverage. (Not to mention giving yourself some peace of mind!) Business insurance helps protect you from unexpected costs.

At NEXT, you can buy coverage, get your certificate of insurance and manage your policy all online. Get an instant quote today for a simple, easy way to get small business insurance online.

Start an instant quote.