How you decide to fund your business is one of the first, and most important, financial choices you'll make. How you choose to fund your business venture could affect other aspects of your business. Below is information and resources of the different types of Funding options available to you.
Fund your Business, Small Business Administration
To obtain funding for your business, you will need to have a good credit score and a good credit history. If you, currently, do not have good credit or are unsure about your credit, you should check out the library's subject guide on credit reports and credit scores by clicking the link below. This guide goes over how to obtain your FICO credit score, a copy of your annual credit report, and strategies for improving and repairing your credit.
Loans and Grants
The biggest difference between a loan and a grant is the repayment. A loan you have to payback, with interest, while a grant is money you don't have to payback. Another difference is that Grants typically have a cap, some organizations that provide grants typically only award the grant once while loans can be granted in multitudes. Grants are a lot of work to apply for and are not a guarantee, where loans are more easily given.
Reasons why you might consider a loan:
In order to increase your chances of securing a loan, you should have a business plan, expense sheet, and financial projections for the next five years. These tools will give you an idea of how much you'll need to ask for, and will help the bank know they’re making a smart choice by giving you a loan. Once you have your materials ready, contact banks and credit unions to request a loan. You’ll want to compare offers to get the best possible terms for your loan.
The most common reason you might consider a grant is free money, this is money you can use to fund research or your small business venture. The downside to grants is that grants take work, and most grant providers also have rules around how recipients can use grant funds. If they don’t spend grants appropriately, grantees may not get another from the same organization.
What Is the Difference Between a Grant and a Business Loan?, Experian
NYC Funds Finder: Find available loan and grant resources, or connect with free one-on-one financing assistance, NYC Department of Small Business Services
An U.S. Small Business Administration loan is a small business loan that can help cover startup costs, working capital needs, expansions, real estate purchases and so much more. This type of financing is provided by participating lenders, typically banks, and backed by the SBA. This guarantee reduces the risk for lenders, making it easier for small businesses to get the funding they need.
SBA loans are a great option for small business owners who are seeking affordable financing with favorable terms. Here’s why these loans provide a solid foundation for growth and stability:
1. Lower Interest Rates: Because the SBA guarantees a portion of the loan, lenders can offer lower interest rates than conventional loans, reducing the cost of borrowing for business owners.
2. Longer Repayment Terms: SBA loans often come with longer repayment terms, which can help businesses manage their cash flow more effectively.
3. Lower Down Payments: SBA loans typically require lower down payments compared to conventional loans, making them more accessible to businesses with limited upfront capital.
4. Support for Businesses with Limited Credit History: Startups or businesses with limited credit history may find it easier to qualify for an SBA loan due to the government guarantee.
5. Guidance and Resources: The SBA doesn’t just provide loans; it also offers valuable resources and support, including mentoring and training programs to help businesses succeed.
7(a) loans: An SBA 7(a) loan is a small-business loan issued by a private lender and partially backed by the U.S. Small Business Administration. Although SBA 7(a) loans can be hard to qualify for, they are an ideal option for business financing due to their long repayment terms and low interest rates. Plus, 7(a) loans can be used for a variety of purposes, including working capital, business expansions or purchasing equipment and supplies.
504 loans: An SBA 504 loan has fixed-rate financing. They cannot be used for working capital, but are a financing solution for small business owners who want to purchase real estate or equipment. These loans can be a good option for small business owners who do not qualify for conventional financing. These loans are funded by certified development companies (CDCs) and third-party lenders and guaranteed by the SBA.
Microloans: Microloans are available through certain nonprofit, community-based organizations that are experienced in lending and business management assistance. Individual requirements will vary. Microloans can be used for a variety of purposes that help small businesses expand. They are used when you need less than $50,000 to rebuild, re-open, repair, enhance, or improve your small business. Proceeds from an SBA microloan cannot be used to pay existing debts or to purchase real estate.
Venture Capital & Angel Investors
Venture capital funds are pooled investment funds that manage the money of investors who seek private equity stakes in startups and small- to medium-sized enterprises with strong growth potential. These investments are generally characterized as very high-risk/high-return opportunities.
An angel investor is usually a high-net-worth individual who funds startups at the early stages, often with their own money. These types of investments are risky and usually do not represent more than 10% of the angel investor's portfolio.
Venture Capital Funds: Definition for Investors and How It Works, Investopedia
Angel Investor: Definition and How It Works, Investopedia
Competitions and Prizes
Business Competitions can be a great way to validate your ideas and raise seed money for your business. There are a number of Business Competitions, including Brooklyn Public Library's very own PowerUp! Business Plans Competition. Each competition has its own set of rules and requirements and occassionaly may be Industry specific. Even if you don't win the prize money you still gain experience that can carry over when pitching your Business elsewhere.
Crowdfunding
Crowdfunding raises funds for a business by sourcing money from a large group of people called crowdfunders. Crowdfunders are not technically investors since they do not receive a share of ownership and don't expect any financial return on their money. It is more likely that crowdfunders will expect a "gift" from your company as thanks for their contribution. This could be in the form of the product you are trying to sell or a special perk. This is a popular option because it is very low risk for the business owner. Like with self-funding, crowdfunding allows you to retain full control of your company and if your plan fails you are under no obligation to repay your crowdfunders. Make sure you read the fine print and understand your full financial and legal obligations before commitng to a crowdfunding platform.
What is Crowdfunding? Here are Four Types for Startups to Know, Stripe
Personal Funds/Credits
Using your personal funds lets you leverage your own financial resources to support your business. With self-funding you have complete control over your business but you also take on all the risk. Alternatively you can apply for a Business Credit Card provide business owners with easy access to a revolving line of credit with a set credit limit in order to make purchases and withdraw cash. Like a consumer credit card, a small business credit card carries an interest charge if the balance is not repaid in full each billing cycle.