Most small business owners immediately think of taking out a personal loan to launch a startup or improve cash flow. While taking out credit is one option, funding for small business can also take many different forms, including grants, investors and generating quick revenue.
Small businesses drive the economy. According to the Small Business Administration, smaller companies hire around 46.4% of the United States’ workforce. Not only is small business crucial to keeping the economy moving by employing citizens but most companies invest in their local communities. For example, a pizza restaurant might sponsor a little league team or start a program to clean up local parks.
For a strong start, small businesses need funding. Learn about the challenges to access funding for small business, traditional sources of money and modern age options.
The Challenges in Funding for Small Businesses
Small businesses often run into cash flow problems. Figuring out where to get the funding for a small business to overcome growth challenges or temporary obstacles is challenging. Lack of knowledge about available funding is one of the biggest hurdles to securing funding for small businesses.
Around 38% of startups fail because they run out of cash to operate their companies. You may have heard of the death valley curve. This is the time when a startup opens but hasn’t brought in revenue. Nearly every venture burns through cash in the early days until it becomes profitable. The length of time a business is in the “Valley of Death” curve varies.
Minority-owned businesses may have a bit more of a challenge. The Federal Reserve recently looked at how much racial bias affects lending and found minority applicants sometimes have lower credit scores and higher leverage. Since most lending institutions use algorithms to make financing decisions, the system can be race-blind.
The report indicates up to a 2% gap in approvals for minorities. The good news is that the numbers are narrowing. If you’re a minority business owner, be aware of the nature of lending practices and focus on alternative funding as well as improving credit scores.
Traditional Sources of Funding for Small Business
You might even be a startup with zero capital. While there are many creative ways to grow without cash, knowing the traditional sources of funding for small businesses helps open up a world of opportunities.
Bank loans and lines of credit are probably the most common places where businesses access cash. Most small business loans will be on the owner’s personal credit and based on their individual credit score.
Another option is to look to personal financing and funding from family and friends. Turning to methods such as pulling cash from a personal line of credit or putting purchases on a credit card can come with risks. Credit cards notably have extremely high interest rates. Paying off the balance becomes harder the higher the balance is. Pay close attention to how long it takes to finish paying off a credit card balance when you stick to the minimum payment.
Taking money from family and friends may have less of an impact on credit score but can damage relationships. Strive to set up a payment schedule and repay those who’ve lended money as quickly as possible.
Angel investors tend to have high net worth and want to invest in something outside of the traditional stock market. In 2020, they invested around $25 billion in startups during the early stages. An advantage of working with an angel investor is that they often have experience growing a successful brand and can serve in an advisory capacity.
Modern Sources of Funding
If traditional forms of funding for small business aren’t quite cutting it, seek some modern options gaining popularity as more people work and do business online.
Crowdfunding is an interesting way to raise money for a new product idea or something fresh. To attract the attention of consumers, who pool their money to help small businesses over monetary hurdles, you must offer something in return. Sites such as Kickstarter let inventors collect funds and those investing get the product first at a discounted price.
Crowdfunding Evens the playing field, allowing small companies to get in the game. Uber is an example of a startup that used crowdfunding to raise over $1 billion. Airbnb also raised more than $2 billion via their website and through the mobile app. Many companies looking for funding for small business outside of normal channels go on to see great success.
Don’t overlook free money or government loans with lower interest rates. While you can certainly apply to government grants, you may find the competition is fierce. Many are geared at a particular demographic or type of business and you may not qualify.
Your best bet is to look at private grants through various brands. Make sure the brand’s values align with your own and check their requirements. In the early stages of starting a new company, a few thousand dollars can give you the boost needed to survive.
Strategies for Securing Funding
Ensure you have a solid business plan in place before seeking funding. Have you ever watched the show Shark Tank where people pitch their business models to angel investors and gain funding? If they don’t have a firm grasp of finances, they often get turned down.
You must understand how your business functions. What are the strengths and weaknesses? At the same time, you need to know who the competition is and how you offer something better to attract funding. Market research is a key component of finding financing.
Take the time to network with people in your industry. Someone who understands your business is more likely to invest both monetarily and with their time. Attend local chamber of commerce meetings, join organizations related to what you do and ask who in your area is an expert in the industry.
Future Trends in Small Business Funding
The trends of today may not measure up in a decade. Consider potential cutting edge funding options that might take off soon. You’ve likely noticed the trend on social media to give people a few tokens for interesting content. What if you could leverage tokenization to fund your startup or new product launch?
As people get online more frequently and artificial intelligence takes over more and more daily tasks, expect the way businesses operate and fund cash flow to change. Be open to new technology and new changes as they hit the pipeline. Try small experiments to see what works for your business. Repeat the things that are successful and replace the ones that aren’t.
Even in a tight economy, one could collect a few tokens from multiple people and come up with enough financial input to move forward with a project.
Seek Funding for Your Small Business Today
When it comes to finding funding for your company’s needs, don’t delay. You’ll face some challenges, such as rising up against competitors. However, with a focus on traditional funding, modern options, crowdfunding, grants and new trends as they arrive, you’ll secure enough money to drive growth.
If you’re in a position to support a small business, look for the ones with the most potential and a solid plan of action. If you’re looking for funding strategies, seek various sources until you have enough cash flow to thrive. Small businesses have ups and downs. Make sure your downs are just little blips on the big screen of success.